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SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This presentation contains forward-looking statements within the
meaning of the "safe harbor" provisions of the United States
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 the businesses of FirstEnergy Corp. and GPU, Inc. 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. These factors include, but are not
limited to, risks and uncertainties relating to: failure to obtain
expected synergies from the merger, delays in obtaining or adverse
conditions contained in any required regulatory approvals, changes
in laws or regulations, economic or weather conditions affecting
future sales and margins, changes in markets for energy services,
changing energy market prices, availability and pricing of fuel
and other energy commodities, legislative and regulatory changes
(including revised environmental and safety requirements),
availability and cost of capital and other similar factors.
Readers are referred to FirstEnergy's and GPU's joint proxy
statement/prospectus dated October 19, 2000, and their most recent
reports filed with the Securities and Exchange Commission.
1
1 The following information is the transcript
2 of FirstEnergy Corp.'s webcast presentation
3 to the financial analysts on Monday, October 30,
4 at the Edison Electric Institute Financial
5 Conference in San Francisco. The live webcast
6 of the presentation can be accessed at the
7 following Internet address: www.firstenergycorp.com/ir.
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1 P R E S E N T E R S
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3 MR. PETER BURG
4 MR. RICHARD M. MARSH
5 MR. KURT E. TUROSKY
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1 MR. TUROSKY: I'd like to welcome
2 everybody here. My name is Kurt Turosky, and I'm
3 the manager of Investor Relations. And, again,
4 I'd like to welcome everyone here that can join
5 us for our luncheon here today, as well as those
6 listening in on the Internet for our Webcast.
7 In just a minute, Pete Burg and Rich Marsh
8 will provide an update on FirstEnergy's strategic
9 and operational performance and outlook. In that
10 regard, I'd like to mention that this
11 presentation contains certain forward-looking
12 statements within the meaning of the "Safe
13 Harbor" Provisions of the United States Private
14 Securities Litigation Reform Act of 1995. We
15 encourage listeners to read the Safe Harbor and
16 additional information statements concerning
17 forward-looking information contained at the back
18 of the presentation slides.
19 I'd also like to mention that copies of our
20 joint proxy statement dated October 19th, 2000,
21 regarding our merger with GPU are at the back of
22 the room, as well as available on our website.
23 Now, I'd like to introduce Pete Burg, our
24 Chairman and CEO.
25 MR. BURG: Thank you, Kurt.
4
1 I'm glad we got the American Bar Association
2 preliminaries out of the way there, or whatever
3 that was.
4 Welcome to all of you. We know we're
5 behind. We're trying to move quickly, trying to
6 allow some time for questions, but at the end
7 here, when your agenda has ended, we understand
8 if you have to get up and leave. So no problem
9 with us on that. I'm not encouraging you to
10 leave when you're done eating, but in case you
11 need to, we understand.
12 The big thing we want to get across to you
13 today is that our strategy is essentially on
14 course. We've made significant progress, we
15 think, in positioning FirstEnergy to become the,
16 really, premier-energy and related-services
17 supplier in the targeted region that we have in
18 the northeastern quadrant of the United States.
19 Our earnings and cash flow have enabled us to
20 really strengthen our balance sheet and also to
21 allow the expansion of our unregulated
22 businesses.
23 We've reached a significant milestone,
24 obviously, in the past year in Ohio with the
25 transition plan being approved, giving us the
5
1 opportunity for stranded cost recovery and also
2 the opportunity for our unregulated affiliates to
3 compete on a level playing field in Ohio.
4 We continue to improve our performance at
5 the generating aspect of our operations. We have
6 a world-class nuclear operation at Perry and
7 Davis-Besse, and Beaver Valley is continuing it's
8 improvement. And Rich will talk some more about
9 that later. The GPU/FirstEnergy merger that we
10 announced here about two months ago accelerates,
11 really, our retail strategy. It doubles our
12 customer base and, we think, enhances our revenue
13 and earnings prospects are going forward.
14 We're organizing ourselves really into three
15 business units: the competitive element, the
16 shared services unit, as well as the wires or
17 regulated segment. Earnings drivers for each of
18 these segments are shown on the chart here at the
19 bottom and in the handouts that you have in front
20 of you, that are underneath your lamb chops or
21 whatever you have in front of you right now.
22 We'll spend most of the rest of the day,
23 though -- most of the rest of the time, I should
24 say, discussing the competitive business unit.
25 The success and growth of our retail
6
1 strategy, we think, will come from cost
2 effectively -- cost effectively building market
3 share in the 13-state region that we've targeted.
4 Our customer focus is on a segmented, large
5 commercial and industrial accounts and the mass
6 market in our franchise territory. I want to
7 reemphasize that, because we've talked in the
8 past about our retail strategy, and the retail
9 strategy, again, focuses on residential only in
10 our franchise territories, but commercial and
11 industrial accounts outside of those areas.
12 We're forging partnerships -- long-term
13 partnerships with our customers to maximize
14 margins through bundling value-added services.
15 We think we really are distinguishing
16 ourselves, vis-a-vis our competitors, with an
17 integrated portfolio of asset backed products and
18 services and really becoming the customer's
19 one-stop source for energy solutions. And some
20 indications of our early successes come from our
21 MESA contracts and from our gas program that I'll
22 talk about here in a second.
23 First of all, the Master Energy Service
24 Agreements or MESAs, they really are the total
25 customer solution, our one-stop shop. We manage
7
1 all of the customers' energy and facilities needs,
2 enabling the customer to focus on their core
3 business. MESAs are long-term partnerships with
4 large multi-facility accounts. We have specific
5 industry segments that we're targeting in the commercial
6 and industrial marketplace. It's a win-win situation, we
7 think, for both parties. It reduces the customer's
8 energy costs and provides high-value added margin
9 services.
10 I can tell you firsthand I've met in the
11 last week with three of these kinds of accounts
12 where we're trying to sell our multi-facility
13 sites, and I am further reinforced that there are
14 substantial opportunities here for us and for no
15 other reason really than the fact that -- you'd
16 be surprised at the level of knowledge at the
17 senior-management positions, I'll say, with
18 respect to energy buys that many companies have
19 across this country. I think we're opening eyes
20 up at times when we come and talk to them.
21 In terms of some -- just a few examples of
22 successes we have shown here: the Republic
23 Technologies, a five-year deal to purchase all of
24 their commodity energy services; the Reserve
25 Group, a five-year $150 million revenue transaction;
8
1 Boyas Excavating, now conducting the
2 largest economic development project in the State
3 of Ohio and the suburb of Cleveland. We signed,
4 with Kent State University, a three-year contract
5 at eight of their facilities. Acme food stores,
6 a three-year contract at 51 of their facilities.
7 But these are the kinds of successes we're having
8 in these areas. We're presently in discussion
9 with numerous other accounts, and we would hope
10 to be able to announce some of those successes
11 again in the near future.
12 I will tell you, however, one of the
13 frustrating things about these kinds of sales is,
14 it's not something that, you know, a broker might
15 come in the door and say, "Hey, you want to buy
16 some FirstEnergy stock today?" And the customer
17 says, "Done" or "Not done." These things take
18 some nurturing. So sometimes over several --
19 over several months.
20 Another recent success was our so-called
21 "Blue Light Special." This is the advertisement
22 that we used in the paper. Really, it was a
23 gas-choice program in the Dominion East Ohio
24 territory in Ohio. We launched a campaign that
25 would have achieved, if successful, in our view,
9
1 about 23,000 accounts during the initial phase
2 and about 43,000 accounts by the end of the
3 second phase, really, or into next year. It was
4 an overwhelming success.
5 As we speak here today, we have 115,000
6 accounts that we garnered on that program. Over
7 90 percent of them selected a three-year term,
8 and it really was a significant step, we think,
9 for us, to jumpstart our image as being, really,
10 the total-energy provider in our previously
11 native territory -- native franchise territory,
12 if you will.
13 Again, we think it was successful in the
14 sense also, that many of those customers -- most
15 of those customers asked for information on the
16 Electric Choice Program that will begin next year
17 with FirstEnergy Services. Also, the
18 customer-acquisition costs were only about a
19 fourth of what we had originally intended to
20 spend just because of the positive press that we
21 got on the program itself.
22 We think there are significant growth
23 opportunities for us on the natural gas side of
24 the business. The economics of this transaction,
25 I will tell you they were profitable. Were they
10
1 "wanted to kick your socks off," if you will?
2 No. But we think it is an investment, they were
3 profitable, and we think it was a very positive
4 investment for the long term. And, again, we
5 were flabbergasted by the success. We actually
6 had people actually lining up -- lining up in
7 cars at our sales office to get their forms in
8 before the deadline.
9 Well, this slide that I want to touch on
10 here is one from the merger presentation that we
11 made after the GPU/FirstEnergy announcement,
12 talking about a 7- to 8-percent post-merger
13 earnings per-share target. We're expecting the
14 unregulated sides of the business to be the key
15 drivers there. The electric and natural gas
16 commodity and facility services groups are the
17 main components of that unregulated business
18 segment.
19 As these enterprises evolve, we view these
20 businesses, really, as our emerging stars, with
21 high growth potential and high margin potential.
22 And the merger will increase our customer base,
23 and we think it does accelerate this retail
24 strategy and enhances our growth potential.
25 We wanted to spend a few minutes today to
11
1 focus a little bit on the power-supply
2 opportunities that we see with respect to the
3 GPU/FirstEnergy merger. We are confident -- we
4 are confident that we can cost effectively manage
5 this situation through a balanced portfolio
6 approach, involving three elements: Owned
7 assets, contracts and spot market purchases.
8 The balanced approach, obviously, protects
9 us from fluctuating market prices. For example,
10 if we're long generation, we're at risk for
11 falling prices. If we're short generation, we're
12 at risk to rising prices. And, really, at these
13 former stand-alone situations was essentially
14 100-percent physical assets; didn't really
15 possibly provide the best possible balance from a
16 risk-management standpoint. By managing the
17 supply needs, really, of this bigger base, we
18 think we can improve our overall risk position.
19 Going forward, then, a balanced approach is
20 preferred, really given the inherent uncertainty
21 that we will be facing in these new deregulated
22 markets. Uncertainties including fluctuating
23 market prices as well as customer switching
24 rates. And as the market continues to unfold,
25 I'll also tell you we'll be flexible with respect
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1 to our portfolio mix. It will be dynamic going
2 forward.
3 The fact that FirstEnergy has substantial
4 generating capacity and is adding more, I think,
5 provides us with many more options to cost
6 effectively manage the GPU supply needs going
7 forward. We have substantial experience managing
8 supply needs in the Pennsylvania and New Jersey
9 markets, both through our Penn Power subsidiary as
10 well as our unregulated sales activities that
11 have taken place over the past year or so.
12 We've implemented a comprehensive risk and
13 credit management program throughout our
14 organization that will enable us to avoid some of
15 the pitfalls that we've seen in the marketplace.
16 We think we're also well prepared to manage the
17 transmission side of the equation. We're
18 interconnected, as you know, with GPU. We think
19 alternative transmission routes are available in
20 the system. Non-firm transmission, really, is
21 available throughout most of the year. And
22 physical delivery is not necessary to effectively
23 hedge in PJM, as I'll give you an example of on
24 the next page, based at all times.
25 Owning generation, as I said, gives us two
13
1 key options. One is the ability to effectively
2 hedge against rising markets prices in PJM. For
3 example, the prices in PJM and ECAR, the area
4 that FirstEnergy is in, really are pretty much
5 highly correlated. When prices spike in PJM
6 during peak and load conditions and we are buying
7 in the spot market at that point in time, we're
8 able to mitigate those price spikes by selling
9 into the ECAR market, maybe sometimes at higher
10 prices.
11 Another option is to increase the output
12 from our fossil units, which, really, recently
13 have been underutilized if for no other reason
14 than our nuclear facilities have been running
15 so well. So we think that is very important to
16 us as well in managing this.
17 Also, the substantial fuel savings that
18 we've recently realized on the fossil side of our
19 business really have made most of our fossil
20 units very, very competitive at the margin.
21 Also, in increasing our utilization of these
22 facilities, we'll make the units more cost
23 effective. There are now significant costs
24 associated with cycling some of these fossil
25 units that really were not designed for cycling
14
1 purposes.
2 At these (units), generation capacity is
3 expanding. We currently have about 12,000
4 megawatts of generation and are adding a little
5 over 1,150 megawatts of gas-fired CT's by the
6 summer of 2002. Also, various contractual
7 obligations are terminating in the next few
8 years, freeing up an additional 830 megawatts for
9 sale. We expect to garner another 500 or so
10 megawatts on peak through liability improvements
11 as well as capitalizing on the differences
12 between the FirstEnergy system peak and the GPU
13 system peak, which are not totally coincidence.
14 Our recent experience -- a recent experience
15 in sourcing power in PJM for unregulated business
16 activities and expansions proved to us that there
17 is reasonably priced capacity in PJM.
18 Significant generation additions are also planned
19 over the next couple of years. Some 10,000
20 megawatts are planned for the PJM area. Now, I'm
21 not saying that all of that's going to be built,
22 but even if a significant amount or a reasonable
23 amount of that is built, that will obviously free
24 up capacity.
25 We're currently also evaluating some
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1 innovative medium and long-term arrangements.
2 Some of these alternatives include gas-towing
3 arrangements and capacity swaps from our ECAR
4 units.
5 In managing our commodity risks, one
6 additional element will be to adjust our supplies
7 portfolio, as I said before, to better match the
8 evolving characteristics of our sales portfolio
9 with respect to both customer loads, as well as
10 contract terms.
11 And, finally, let me say just briefly that
12 by reiterating -- I want to reiterate our
13 confidence in our ability to meet the supply
14 needs cost effectively and to mitigate our risks
15 through a balanced portfolio approach, as I said,
16 involving efficient, low-cost generation,
17 innovative long-term supply contracts and
18 strategic spot purchases, while at the same time,
19 I think, giving us opportunities to further
20 enhance the value, if you will, of our
21 fossil-generating assets.
22 And I will stop here, and I'll ask Rich
23 Marsh, our Chief Financial Officer, to come up
24 and give you some more details with respect to
25 our financial position and what we're doing
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1 operationally as well as the merger.
2 So Rich?
3 MR. MARSH: Thanks, Pete.
4 Good afternoon everybody. I appreciate everybody
5 making time in their schedule to be with us
6 today. I know there's lots of demands on your
7 time, but we appreciate you joining us.
8 In the brief time that I have today, I want
9 to try to give you some updates on three things.
10 First, some of the progress we've made in terms
11 of both our fossil and nuclear generation, as
12 Pete mentioned; second, to give you an update on
13 the timing regarding the merger, and the third
14 item is to talk just very briefly about our
15 recent financial results.
16 Pete talked about some of the improvement
17 we've made in our generation, and, obviously, the
18 reliability and competitiveness of our units is
19 going to be even more important going forward.
20 It's been an area of considerable focus for us,
21 and it's been an area of considerable investment,
22 both in terms of O&M dollars and capital
23 dollars to improve these units.
24 We've made many strides both in our nuclear
25 and fossil fleets to increase availability and
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1 reduce production costs and to make them more
2 competitive at the margin, as Pete mentioned.
3 We're also installing additional peaking
4 generation, which will help us get a more
5 appropriate balance between base-load units and
6 peaking units, and we plan to take advantage of
7 the scale that 12,000 megawatts generation gives
8 us to continue to gain further cost and
9 operational efficiencies.
10 I want to briefly talk about some of the
11 things we've done in our fossil-fuel costs. This
12 is an area that maybe is not as widely recognized
13 as it should be. We have made some very
14 significant improvements in terms of our costs,
15 dollars-per-megawatt hours, which improves the
16 competitiveness of these units at the margin -- a
17 lot. As you know, fuel makes up about two-thirds
18 of the total costs of fossil production. We're
19 projecting about a 30 percent decrease in our
20 fossil fuel and related expenditures over the
21 1998 to 2001 time frame. That's reduced our
22 year-to-date fuel costs by about $94 million, or
23 27 cents per share. So a very significant item
24 in terms of the income statement.
25 There's two factors driving this. The first
18
1 is the end of the Quarto contract, which is
2 the contract dating back many years in our
3 Mansfield unit, which is our largest fossil fire
4 plant, 2,360 megawatts. The elimination of that
5 provides a direct savings of about $58 million a
6 year. So a very significant benefit.
7 The second factor in this trend is what we
8 call "conversion economics," which is really
9 matching the fuel mix, both in terms of the
10 quality and the cost of the fuel that's burned,
11 to market conditions.
12 The premise is fairly simple: When market
13 prices are low, we burn low fuel quality,
14 low-cost fuel. And it can be even, in some
15 instances -- for instance, in our Mansfield
16 plant -- pet coke, which is probably one step
17 above dirt, both in terms of cost and in terms of
18 quality.
19 When market prices are high and we want to
20 run the plant at maximum capacity, we burn
21 high-value coal.
22 So it's really matching the input with the
23 market conditions, and the key to this is our
24 ability to make those changes very quickly as the
25 market cycles. This is not something where you
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1 often have a one- or two-day or three-day time
2 period. You have to be able to cycle these fuel
3 mixes in response to quick moves.
4 I wanted to talk about our nuclear
5 portfolio. I think it's fair to say we have a
6 lot of pride in the progress we've made with our
7 nuclear units over the last several years.
8 You'll remember, we have four units now at three
9 sites. We have Perry, Davis-Besse, which was
10 formerly operated by Centerior, and we also have
11 full ownership now of Beaver Valley Units 1 and
12 2, which were previously operated by Duquesne. In
13 total, it's about 3,700 megawatts or about 31
14 percent of our total generation. And we operate
15 these as a portfolio through our FirstEnergy
16 nuclear operating company.
17 This chart shows some of the progress we've
18 made with the Davis-Besse and the Perry plants in
19 terms of capacity factors. And you might
20 remember that not too many years ago, these
21 plants were considered troubled, and, in
22 particular, Perry was considered a very troubled
23 plant. Over the last several years, we have
24 turned these into what I can truly say are
25 world-class units, world-class in terms of
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1 performance and in terms of rankings.
2 A couple of indicators of the progress we've
3 made have -- for instance, over the 1999 period
4 through October of this year, these plants have
5 operated at a force-outage rate of virtually zero
6 percent. Davis-Besse, for instance, was
7 available for 346 days last year. Perry's last
8 refueling outage, which took place in 1999, was
9 37 days, the shortest ever, and that's a record
10 for any similar unit. So a tremendous amount of
11 progress.
12 Beaver Valley, you might remember, prior to
13 the swap with Duquesne at the end of 1999, we owned
14 about three-quarters of that unit, but we had no
15 operational control. Performance of those units
16 have been deteriorating and, in fact, was the
17 major compounding factor in the events of the
18 market meltdown of the summer of 1998.
19 You might remember, for instance, Beaver
20 Valley 1 was off-line for the first eight and a
21 half months in 1998, while Beaver Valley 2 was
22 off-line for the first 11 months of that year. So
23 those units were virtually unavailable to us
24 during much of that time period when power prices
25 were very high.
21
1 Following the swap, we took our management
2 team from Perry that was responsible for turning
3 that unit around, moved them over to Beaver
4 Valley so that they can supervise that, and I
5 think -- although they have some challenges to
6 continue to overcome in terms of material
7 conditions, I think they've made some tremendous
8 improvements. Once again, these two units have
9 operated at a force-outage rate of virtually zero
10 percent this year versus 60 to 75 percent, which
11 is where they had operated in 1998.
12 Refueling outages have been greatly
13 shortened. Beaver Valley #1 this year was 52 days
14 versus 74, which was the average for the prior
15 four outages. Beaver Valley just came off of a
16 refueling outage of 32 days versus its average of
17 73 days. That was the shortest ever. That was a
18 station record and a FENOC record and was well
19 in advance of our 44-day budget. So great job
20 there. And, obviously, these improvements
21 translate into reduced nuclear production costs.
22 Although this trend obviously gets impacted
23 by refueling, you can see the trend is downwards,
24 and we're projecting about a 30-percent reduction
25 in nuclear production costs over the '98 to 2001
22
1 time period.
2 We're also increasing the capacity of some
3 of the units. Perry, for instance, we've
4 upgraded 42 megawatts this year, with an
5 additional 18 megawatts coming on-line in the
6 spring of next year. That gives us more power
7 without any additional incremental O&M costs.
8 And also we're extending the refueling outages.
9 Both Perry and Beaver Valley were moving from an
10 18-month to a 24-month cycle. And we will
11 continue to use the advantages of a FENOC, our
12 nuclear operating company, to operate those as a
13 portfolio and take advantage of the shared savings
14 and services that that brings about.
15 I wanted to shift gears a little bit and
16 talk about the merger and give you an update. As
17 Pete mentioned, GPU's 2 million customers and
18 their geographic proximity make it a great fit
19 for our retail strategy. We're very excited
20 about the potential that this will bring to our
21 shareholders. As we announced when the merger
22 was announced on August 8th, it will be
23 immediately accretive to both earnings and cash
24 flow and will allow us to grow our earnings more
25 rapidly then we could have before.
23
1 You might remember, we were sort of at about
2 a 5-percent annual growth rate. This will allow
3 us to grow our earnings into what we believe is
4 7- to 8-percent earnings rate going forward. It
5 also gives us some meaningful synergy
6 opportunities. You might remember we announced
7 that we believe we've captured 5 percent of
8 nongeneraton O&M and synergy savings, which is
9 about $150 million.
10 The clock is running incredibly fast in
11 terms of the time frame with the merger. We've
12 been very fortunate in terms of moving things
13 along so far. We were fortunate that the SEC
14 chose not to review the proxy. So that became
15 effective on October 13th. It was mailed out to
16 shareholders on October 19th.
17 The shareholder vote is scheduled in both
18 Akron and Morristown for Tuesday, November 21st,
19 which is only three weeks away, and that seems
20 hard to believe. Certainly, those of you here on
21 the buy side, that have an influence on the
22 proxy voting process, we certainly look forward
23 to your support.
24 As a refresher, the requirement to approve
25 the transaction for GPU, the majority approval of
24
1 votes cast for FirstEnergy, it's a majority
2 approval of shares outstanding. We're very
3 mindful of the need for a quick integration and
4 to prepare the Company to hit the ground running
5 on day one. We learned a lot with the
6 integration process that we went through with
7 Centerior. I think that's going to serve us very
8 well as we go into this process as well.
9 We have already started the merger
10 integration effort, and we're breaking this into
11 what we call a "two-track approach."
12 The first is we have nine strategy teams
13 that will look at some of the higher-level issues
14 involved with merging the two companies; not so
15 much focusing on cost reductions or efficiencies,
16 but rather, some of the strategic issues, such as
17 commodity sourcing, obviously, a very important
18 team, information technology, Telecom, sourcing
19 and procurement strategy, talent management.
20 Those teams are in place and operating now,
21 already holding meetings.
22 We're also getting geared up for the actual
23 transition efforts, putting the two companies
24 together. There will be 12 teams for that. That
25 process begins here in a few days in November,
25
1 and we expect to have that finished by April.
2 So, hopefully, by the time springtime rolls
3 around, the integration process will be just
4 about done.
5 Most of the teams will be headquartered
6 in -- in the Cleveland area. A few will operate
7 with some connection to Reading and Morristown as
8 well. And the Steering Committee is in place as
9 well. Pete Burg is chairing that. It also
10 includes Tony Alexander; Earl Carey, who is the
11 head of our distribution group; and myself from
12 the FirstEnergy side; and Fred Hafer, Carole
13 Snyder, and Mike Chesser from the GPU side.
14 Regulatory approvals. I know we've received
15 many questions about how we're doing on that, and
16 there's been a lot of activity there as well.
17 The first regulatory filing that we made with the
18 joint application with GPU to the NRC, and it was
19 for the indirect transfer of possession-only
20 licenses for TMI-2, and also for the Saxton
21 experimental research reactor, which is nearly
22 decommissioned. That was done in September.
23 We also have a whole host of filings that we
24 expect to make over the next several weeks. And
25 those include the FERC, the FCC, the Pennsylvania
26
1 and the New Jersey Commissions. Obviously very
2 important filings. The SEC under the Public
3 Utility Holding Company Act, and, also, we do
4 have one foreign approval, which is in Argentina.
5 You might notice I did not say Ohio.
6 Commission approval on that, our belief is that
7 it does not require formal approval of the Ohio
8 Commission.
9 So things are moving very rapidly. We're
10 pleased with the pace we're making, and,
11 obviously, we look forward to updating you after
12 we make these filings.
13 I wanted to shift gears a little bit and
14 talk quickly about our financial results in 2000.
15 Earnings were released October 17th. I
16 think many of you probably either listened in on
17 the call or got an earnings release. So I'm not
18 going to spend a lot of time on this. Just a few
19 quick high points. In the first quarter,
20 earnings were 89 cents a share. That's an
21 increase of about 8 and a half percent from the
22 prior year. And on a year-to-date basis, $2.12,
23 which is an increase of 7.6 percent.
24 The themes were similar in the third
25 quarter. I know with many other utilities,
27
1 obviously, weather was an important factor. The
2 mild weather had a very detrimental impact on
3 sales. For instance, residential sales were off
4 about 20 -- I'm sorry -- about 10 percent during
5 the quarter. And on a year-to-date basis, that
6 weather impact and reduced sales revenues has
7 taken about 23 cents per share off earnings. So
8 very significant.
9 Some of the drivers that helped us grow
10 earnings during that period were reductions in
11 fuel and purchase power. As I mentioned, gains
12 from the sale of emission allowances and reduced
13 financing costs. And those were somewhat offset
14 by the lower electric revenues from the mild
15 weather. Increased O&M costs of some of our
16 generating units, and a slightly reduced
17 contribution from our non-reg businesses.
18 The O&M increases that I mentioned were
19 largely driven by three items: increased
20 ownership of nuclear following the swap, three
21 refueling outages at our nuclear plants this year
22 versus two last year, and also some increased
23 levels of fossil maintenance at some of our major
24 units and also some diesel generators that were
25 leased as part of our summer risk supply
28
1 strategy.
2 This chart shows a metric that we use
3 internally, which is called "shareholder cash
4 flow," which is the cash flow that remains after
5 construction; after nuclear fuel fabrication;
6 after interest, preferred dividends and taxes.
7 So basically, it's the cash flow after everything
8 except payment of the common dividends. So this
9 is a good measure of the cash that's available
10 for us to reinvest, or to buy back shares, pay
11 off debt, make acquisitions, so on and so forth.
12 These numbers are for
13 FirstEnergy stand alone. Don't take them to
14 impact the merger.
15 You can see, this year, we're expecting a
16 shareholder cashflow of about $880 million.
17 After dividends, that's about $547 million. A
18 slight increase next year to about $900 million or
19 about $568 million after dividends.
20 One of the very important uses for that free
21 cash flow has been to reduce our debt leverage to
22 pay off debt. And over the 1997 to '99 period,
23 we've retired about a $1.2 billion worth of debt,
24 refinanced an additional $2.1 billion worth of
25 debt, which has produced interest savings of
29
1 about $186 million. We've also reduced our
2 leverage from 67 percent to 59 percent. So very
3 big progress in that area.
4 So far, this year, we've paid off/redeemed
5 for $383 million worth of debt. A little bit
6 more to go in the fourth quarter. There will be
7 slightly over $400 million by the end of the
8 year. And we've also refinanced $450 million
9 worth of debt; primarily, pollution-control
10 notes. Together, these activities, this year,
11 will produce annualized earnings of $31 million
12 or about 7 cents per share. So it's a
13 significant item in our ability to grow earnings
14 going forward.
15 Obviously, we're very gratified that our
16 debt-reduction efforts have been recognized
17 recently by both Moody's and Fitch, in terms of
18 upgrades. The senior secured debt of our
19 operating companies is now at an investment grade
20 level from those two agencies. So we're -- we're
21 happy to see that the progress that we've made is
22 being recognized in terms of improved debt
23 ratings.
24 I wanted to give you a quick update on our
25 share-repurchase program as well. You might
30
1 remember that in 1998, the board approved the
2 purchase of up to 15 million shares over a
3 three-year period. We started that program in
4 1999, and we're, right now, about probably
5 three-quarters of the way done. We've purchased
6 11.4 million shares in total, a little over 5
7 million shares so far this year. Those numbers
8 also include 1.4 million shares that we acquired
9 through our forward structure, in which we'll
10 settle in the next week or two, I believe, in
11 early November.
12 So our expectation is we will go ahead and
13 conclude this program probably in the first
14 quarter of 2001. We've been buying these shares
15 on an opportunistic basis. Obviously, we think,
16 right now, the stock has great value. So our
17 expectation is we're going to go ahead with the
18 program and, probably, in the first quarter of
19 next year, finish up that authorization.
20 Just one other quick financial note before
21 we close up today. I know many of you are
22 starting to work on your models for next year and
23 may have questions about how the restructuring
24 plan that we put in place will impact earnings
25 and cash flow. So I just wanted to give you a
31
1 few little high-level indicators of that.
2 Under the plan, our residential customers do
3 receive a 5-percent reduction on the generation
4 component of their bill, which would equate to
5 something like about a -- I believe it's a
6 3-percent overall rate reduction. That will
7 reduce our revenues next year, in 2001, by about
8 $50 million.
9 The transition bill also provides for
10 incentives to the shopping credit: 45 percent
11 for residential customers initially, 30
12 percent -- I'm sorry. 45 percent for
13 residential, 30 percent for commercial and 15
14 percent for industrial. We will recover those
15 incentives through an extension of the recovery
16 period, albeit without carrying costs. So it
17 doesn't have an earnings impact. However, if we
18 do achieve a 20-percent shopping level next year,
19 it will have a cash-flow impact. And we project
20 that to be about a $70 million annualized
21 cash-flow impact if that 20-percent shopping
22 level is met.
23 And, also, I'd just like to make the point,
24 as we have several times in the past, the
25 accelerations that we've been making under our
32
1 1995 and 1997 rate plans will cease at the end of
2 the year. So far this year, we've
3 accelerated about $375 million. I suspect it
4 will be about $400 million or a little bit more
5 by the end of the year. We accelerated $352
6 million last year. So that will go away at the
7 end of the year along with the rate plans.
8 However, we believe that the amortizations, of
9 the recovery of the regulatory assets, next year
10 will about approximate that amount. So we don't
11 expect a material positive or negative impact on
12 earnings, although the nature of those
13 accelerations and amortizations will change after
14 this year.
15 I'd just like to close by trying to review
16 for you the progress that we've made over the
17 last year. I think back to October of 1999 when
18 we were here at EEI, and some of things that
19 we've accomplished over that time, and I think
20 it's -- frankly, I think it's an impressive list.
21 I don't know that it's all being reflected in the
22 stock valuation, but I think we have made a
23 tremendous amount of progress.
24 As Pete said, we have a continued expansion
25 of our retail strategy. We've added 30,000
33
1 commercial and industrial customers in
2 Pennsylvania, New Jersey and Delaware. Those
3 customers are consuming over 4 billion kilowatt
4 hours of electricity. We have wrath of master energy
5 service agreements in place with more being added
6 on a regular basis. And we've also been able to
7 successfully establish ourselves as a gas
8 supplier.
9 Pete mentioned that program, which amounts
10 to about 18-billion cubic feet of gas or about
11 14-percent of East Ohio Gas' total viewput. So
12 very quickly, we've been able to establish
13 ourselves as a major player in the gas
14 marketplace.
15 Also, at this time last year, I think, there
16 probably would not have been too many people in
17 the room that would have taken the bet that we'd
18 be able to come up with a transition plan that
19 would be able to be signed off on by all the
20 major intervenors in the case, and would allow us
21 the opportunity to recovery the $7 billion in
22 stranded assets. But we were able to do that.
23 We were able to come up with a plan that is fair
24 and balanced and will allow our affiliates to
25 compete on a level playing field, going forward.
34
1 That plans gives us a great foundation for
2 success in the future.
3 We have also continued to use the cash that
4 the rate plans have generated to pay down debt
5 and improve our financial flexibility, and we've
6 made some major strides in terms of our
7 generation performance. We've gained control
8 over all our generating units now. The old CAPCO,
9 shared-ownership agreements are all gone. We
10 have total control over all our generating
11 assets, which is an absolute necessity for a
12 competitive marketplace, and we've also been able
13 to make major improvements with our performance
14 of our nuclear portfolio.
15 And, finally, obviously, we announced the
16 merger with GPU, which we remain very excited
17 about. We think that's going to be the
18 springboard for us to take FirstEnergy to a new
19 level.
20 So we're very happy with what we've been
21 able to do over the next year. My wish for this
22 year is when we come back for this meeting next
23 time, those things will by reflected a little bit
24 more fully in our stock price.
25 So that completes our comments this morning.
35
1 What I'd like to do is now open it up to any
2 questions you might have for either Pete or
3 myself, and we'll be glad to try to answer them.
4 UNIDENTIFIED: Rich?
5 MR. MARSH: Yes? Tom.
6 UNIDENTIFIED: Okay. Looking at
7 the numbers year-to-date, you're about 7 cents a
8 share from interest costs savings for next year,
9 and if we had normal weather, that would be
10 another 23 cents above where we are. What is
11 the -- I guess, the other components of growth
12 for next year, excluding the merger?
13 MR. MARSH: Certainly, one of
14 those components of growth is going to be the
15 continued expansion of our retail strategy.
16 Utility services group and sales and marketing
17 group, this year, earnings for those two units
18 have been a little bit behind. Part of that's
19 been power prices in the market, which has sort
20 of held up some of our marketing activities, as
21 has our decision to exit several business lines,
22 such as our customer-advantage program, which
23 wasn't as profitable as we originally estimated.
24 I do expect that you will see a transition there
25 next year, and that those will be a more positive
36
1 contributor to earnings.
2 I should probably mention that if you look
3 at the fourth-quarter consensus earning estimates
4 of 55 cents and you add that to our year-to-date
5 actual, which is $2.12, that would get you the
6 $2.67, which I think is -- should be a pretty good
7 approximation of where we'll end up for the year.
8 Obviously, we've said prior to the merger,
9 we expect earnings to grow at 5 percent going
10 forward, with an acceleration after the merger
11 closed. So if you take something in that $2.67
12 vicinity and assume a 5-percent growth rate, that
13 should get you in the right zip
14 code for next year as well.
15 Thanks, Tom.
16 For those of you listening on the Internet,
17 hands are going up everywhere around the room.
18 UNIDENTIFIED: Could you talk about
19 the future of your Genco after you're able to
20 complete the restructure?
21 MR. MARSH: Starting January 1st
22 of 2001, in Ohio, generation function will be
23 totally unregulated. From a management
24 standpoint, as Pete showed on the one chart
25 today, we're -- we're breaking our company into
37
1 several pieces, and the easiest way to
2 conceptualize it is, take FirstEnergy as it
3 exists today; pull out the regulated wires
4 businesses, T&D; pull out the shared
5 services, the corporate overhead functions, and
6 everything that remains is the competitive
7 business unit.
8 That operation will be totally unregulated.
9 It will serve the needs of the distribution
10 company to a full requirements contract for 2005,
11 but will give us a lot of flexibility to manage
12 that portfolio -- that total portfolio in a
13 manner that's responsive to market conditions.
14 Do you want to add anything to that, Pete?
15 MR. BURG: Well, I hesitate to
16 try to imply what you were getting at there,
17 Peggy, but the other issue could be, are we going
18 to stay? Are we going to keep the generation --
19 or the Genco in place, or are we going to do
20 something as others have been doing here recently
21 and so forth? And I guess our position is --
22 right now, is that hard assets -- some elements
23 of hard assets are positive for us in terms of
24 our strategy. And, obviously, we don't have
25 100-percent generating assets to serve the new
38
1 customer base that we will have, and we feel
2 comfortable with that. We think we're in a --
3 in a very good position.
4 So, at this five minutes in time, it's our
5 view, that given our situation, the best way to
6 add long-term value to shareholders is to operate
7 our generating fleet that we have, or tweak it a
8 little bit in a way that we think is positive,
9 and that will add value for our shareholders
10 long-term.
11 Now, short-term, if we were to sell that
12 tomorrow, maybe that would do something more
13 positive for the next 30 days. But for the next
14 long-term period of time, we think that's the
15 whole -- our strategy is on course.
16 UNIDENTIFIED: Could you tell us --
17 MR. BURG: Go ahead, Norm.
18 UNIDENTIFIED: I was just getting
19 the next one ready.
20 Could you tell us something about your plans
21 license extension on the nuclears?
22 MR. BURG: Okay. Plans for
23 license extension on the nuclear side of the
24 business. We don't have to face that quite yet;
25 but, obviously, a number of other units around
39
1 the country have applied for license extension.
2 I guess one or two have already been granted.
3 All other things being equal, at the time we have
4 to make that decision, I would hope that we would
5 look forward to doing that.
6 And I will say this: Some of the
7 preliminary plans and procedures you have to go
8 through in order to do that we'll be looking at
9 very soon here to -- to possibly begin that
10 process.
11 What I would say to you -- and I mean this
12 sincerely -- that our nuclear fleet, the way
13 they're now operating, have become a competitive
14 advantage for us from both an environmental, as
15 well as a cost standpoint. And so we're looking
16 forward to continue to operate them in that -- in
17 that manner.
18 UNIDENTIFIED: The offer you have
19 in Ohio is very impressive. Is that a
20 fixed-price offer for the customer or a variable
21 price, and how do you source the gas?
22 MR. MARSH: The gas program is
23 a -- is a fixed price. There were two options,
24 and our first offer -- one was a one-year
25 contract, and one was a three-year contract. I
40
1 don't remember the exact prices. Around $5
2 roughly speaking.
3 We went out and hedged the gas for our
4 expected customer load, and then, when the
5 customer load became a little bit heavier, we had
6 to go out and do some more hedging rather
7 quickly, because the demand was so much heavier
8 than we suspected. But we do have a collar in
9 place around that right now. And we will have
10 subsequent offers coming on, and as those
11 customers are added, we'll hedge for that based
12 on current market prices.
13 UNIDENTIFIED: Yes. Two questions.
14 One, you just talked a little bit about your
15 nuclear fleet being a competitive advantage, and
16 you obviously have the experience turning plants
17 around. I was wondering if you have any desire
18 to perhaps purchase some of these plants going
19 forward.
20 And then the second area is -- your
21 mandatory debt reductions for next year looks
22 like it's going to be less than half of what it
23 was this year, but, obviously with -- you know,
24 your debt costs have come down with the rating agencies
25 selling -- you know, upgrading and so forth. Are
41
1 you looking to perhaps do some refinancing to
2 some of the call provisions and some other debt
3 buy-backs, perhaps?
4 MR. BURG: I'll let Rich answer
5 the second part of that question. The first part
6 of that question had to do with, I guess,
7 additional generating capacity purchases,
8 possibly. Is that what you were suggesting?
9 UNIDENTIFIED: In the nuclear area.
10 MR. BURG: Right. Again, we
11 are relatively satisfied with the size of our
12 fleet right now. We may do some tweaking back
13 and forth, but, again, going forward, we will
14 obviously keep our eyes open, but we don't have
15 any current plans to do anything in that area.
16 MR. MARSH: As far as the second
17 part of your question, mandatory reductions next
18 year are in the $180 million range roughly versus
19 a little bit over $400 this year. So it's a
20 little bit less than half. You know, depending
21 on market conditions, obviously, we'll look at,
22 optionally, callable issues and see what options
23 we have there or paying down some of the
24 shorter-term debt facilities as well. But it
25 will give us more flexibility because of the
42
1 lighter mandatory schedule next year.
2 UNIDENTIFIED: (Inaudible.)
3 MR. MARSH: Yeah. The question
4 was: What are the implications from the
5 expiration of the PEPCO contract?
6 Some of you may remember several years ago
7 or maybe even a little bit more than that right
8 now, we have reached an agreement to sell 450
9 megawatts of power to Potomac Electric in the
10 Washington D.C. area, and we've been doing that
11 since that time. That contract will expire at
12 the end of 2005. There is also an option that's
13 available on the contract, I believe, for the
14 amount of power to be cut back should we so
15 desire, an option on our part. So that contract
16 will remain in place, we believe, through 2005.
17 And at that point in time, that 450 megawatts
18 becomes freed up and will allow us to redeploy
19 those, you know, towards our total load, either
20 in our service territory or in the PJM territory.
21 UNIDENTIFIED: (Inaudible.)
22 MR. MARSH: I don't know off the
23 top of my head. It's a decent contract for us,
24 sure. It's been in place for a long period of
25 time. The economic impact, I guess, at that
43
1 point in time, will be where market prices are
2 then versus the prices embedded in the
3 contract. So it becomes a lit bit of, you know,
4 a guessing game at this point, and seeing that
5 that's still a little bit a ways away, it's kind
6 of hard too predict that.
7 MR. BURG: I think the point
8 that Rich is trying to make on that is that we
9 would think that you could be able to find a
10 replacement buyer, if you will, for some of that
11 power, if not all of that power, at that point in
12 time, with hopefully not any disadvantage to us
13 from an earnings standpoint.
14 But we can get that number. I don't have it
15 on hand, either.
16 Okay. I know we're behind schedule. So why
17 don't we take one more question, and then many of
18 us will be around here. And the others of you,
19 if you need to go, you can go. So we'll take one
20 more question, and then we'll stop.
21 UNIDENTIFIED: Yeah. I was
22 wondering about your nuclear-refueling schedule.
23 You said there are two plants this year -- two
24 plant outages. I'm just wondering, you know,
25 what the schedule looks like going forward in '01
44
1 and '02 and what, you know, the cost impact is of
2 those outages, you know, O & M and the
3 replacement fuel.
4 MR. MARSH: There were three
5 refueling outages, which is a little bit unusual,
6 this year. That added roughly $45 million to
7 O&M. Next year, there will be two outages, and
8 I believe, although I'm not positive, in 2002
9 just two outages as well. So this year was sort
10 of an unusual occurrence.
11 Does that answer your question?
12 UNIDENTIFIED: (Inaudible.)
13 MR. MARSH: In terms of O&M
14 costs, about $45 million for the third refueling outage
15 incremental expense.
16 MR. BURG: Okay. Again, we
17 want to just -- just, first of all, thank you all
18 for coming. I want to just make a couple of
19 points before you leave the room.
20 First off all, I want you to know and
21 reiterate for you, reinforce the fact that our
22 strategy is on track, number one.
23 Number 2, the transition plan in Ohio is
24 finalized. Many of you had questions about that
25 for a number of years. That is done. Hopefully,
45
1 that's a positive outcome.
2 Number 3, we continue to be excited about
3 the opportunities with the FirstEnergy/GPU
4 merger. We think there are tremendous
5 opportunities for us and a lot of potential.
6 And, finally, I want to reemphasize the fact
7 that that merger will be accretive to us. I
8 think that should be important as well to you as
9 you value our situation.
10 Thank you all very much for coming and good
11 day.
12 (Thereupon, the proceedings were
13 concluded at 4:43 o'clock p.m.)
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