Filed by FirstEnergy Corp. Pursuant to
Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
of the Securities Exchange Act of 1934
Commission File No.: 333-21011
Subject Company: FirstEnergy Corp.
FIRSTENERGY and GPU
Analyst Teleconference Call
August 8, 2000
10:30 a.m. EDT
Chairperson: Peter Burg, Chairman and CEO of FirstEnergy
OP = Operator PB = Peter Burg FH = Fred Hafer
RM = Richard Marsh TA = Tony Alexander BL = Bruce Levy
LV = Leila Vespoli TN = Tom Navin SP = Unidentified Speaker
OP: Good morning everyone and welcome to the FirstEnergy and GPU Analyst
Teleconference Call. With us today we have Peter Burg, Chairman and
Chief Executive Officer of FirstEnergy, Fred Hafer, Chairman,
President, and Chief Executive Officer of GPU, and Richard Marsh,
Chief Financial Officer of FirstEnergy. After the opening remarks,
we will be taking questions. At that time, if you have a question,
you will need to press the "1" followed by the "4" on your push-
button phone. This call is being recorded and is copyrighted
material, therefore please note that it cannot be recorded,
transcribed or rebroadcast without the company's permission. Your
participation implies consent to our recording this call. If you do
not agree with these terms, simply drop off the line. Now I would
like to turn the conference over to Mr. Burg. Please go ahead, sir.
Peter Burg
Thank you, Operator. Good morning. This is Pete Burg. Thank you
very much for joining us. Obviously we're very excited about the
announcement that we've made this morning concerning the merger of
FirstEnergy and GPU and what it means to both companies, shareholders,
employees, customers, and the communities that we serve.
As the Operator said, before I begin, I'd just note that a number of
company people here with me. In particular, Rich Marsh, our Chief
Financial Officer, Tony Alexander, our President, Fred Hafer, CEO of GPU,
and Bruce Levy, their Chief Financial Officer are on their way. Did I
say Fred was. Fred is CEO, obviously, of GPU. Bruce is CFO. They are on
their way, and unfortunately they're not quite here yet. So we'll get
started and hopefully they'll be here before the end of the presentation.
<PAGE>
I'd also note that this conference call may contain statements that
are considered forward-looking within the meaning of the Private
Securities Litigation Reform Act of 1995. A complete forward-looking
statement is in our press release announcing this transaction and is
updated from time to time in the company's SEC filings.
This morning we announced that the Boards of Directors of
FirstEnergy and GPU unanimously approved the definitive merger agreement
to combine our two companies. Under the agreement FirstEnergy will
acquire all of the outstanding shares of GPU's common stock for a
combination of cash and stock. I'm very excited about our combination
with GPU and the opportunity that we think it'll bring to shareholders,
employees, and customers.
The consideration to be paid for GPU is approximately $4.5 billion.
FirstEnergy will also assume approximately $7.4 billion of GPU's debt in
preferred stock. The combined company will have an equity value of
approximately $8.5 billion based upon both company's closing prices as of
last Friday. We will have the sixth largest customer base in the nation.
There may be a few of you who don't know FirstEnergy, so let me give
you some brief information about our company. We are a diversified
energy services holding company that was formed in 1997 as a result of a
merger of Ohio Edison and Centerior Energy. FirstEnergy companies
provide electricity and natural gas services and a wide array of energy-
related products and services to 2.2 million customers in Northern and
Central Ohio and Western Pennsylvania.
Through this combination with GPU, we will have the size, scale, and
scope to capitalize on opportunities we think in the rapidly changing
energy marketplace. Together with GPU FirstEnergy will serve
approximately 4.3 million customers in Ohio, Pennsylvania, and New
Jersey. The combination of our two companies gives FirstEnergy the
largest customer base in the PJM power pool.
Joining our contiguous transmission and distribution systems doubles
FirstEnergy's customer base in the region that we've targeted for growth.
The combination of our facilities services portfolio, with GPU's MYR
subsidiary, will create the fourth largest mechanical contracting and
construction business in the nation with approximately $1 billion in
annual revenues.
<PAGE>
Our merger also provides a number of other substantial strategic
benefits. It will provide both near and long-term financial growth. The
transaction is expected to be accretive to FirstEnergy's earnings per
share and cash flow immediately upon completion. This merger also offers
substantial synergies from combining our operations as well as the
opportunity to realize significant revenue enhancements. Over the long
run, we expect our earnings growth to accelerate from an estimate of
about 5% on a standalone basis to a 7% to 8% level on a combined basis.
A very important advantage of this transaction is that it will
provide FirstEnergy the opportunity to enhance the efficiency of its
generation portfolio. It provides a significant market for FirstEnergy's
generation capacity and may contribute to meeting GPU's provider of last
resort risk for electricity customers in Pennsylvania and New Jersey.
FirstEnergy's experience in managing power supply requirements
coupled with our planned addition of over 1,150 megawatts of peaking
generation and increased utilization of existing base load capacity will
help GPU decrease it's reliance on spot market purchases to meet their
obligations.
Lastly, we see significantly broadened opportunities in the
unregulated marketplace. Together we will increase market and growth
opportunities for FirstEnergy's natural gas resources and both companies'
mechanical contracting and construction, telecommunications, and e-
commerce resources.
For instance, our merger increases our ownership in two exciting
ventures already underway that we've talked to many of you about before.
America's fiber network, which is positioned to reach about 35% of the
national wholesale communications market, and Pantellos Corporation,
which will operate an Internet-based e-marketplace for the purchase of
goods and services between the energy industry and its suppliers.
Bringing together FirstEnergy and GPU will enable us to realize our
strategic vision of becoming really the premiere retail energy and
related services provider in our targeted 13 state region in the
Northeast quadrant of the nation. At the same time, the transaction
provides substantial economic synergies that will grow both our top and
bottom lines. By doubling the retail customer base and leveraging both
companies' relationships, we will be able to maximize the utilization of
our existing energy and related resources.
<PAGE>
Those resources include electricity from our more than
12,000 megawatts of generating capacity, natural gas from our exploration
and production operations, fiber optic and long distance phone service
from our telecommunications operations, and a wide range of energy-
related services from our network of mechanical contracting and
construction companies.
This merger will provide outstanding value to both companies'
shareholders. We expect near-term earnings and cash flow accretion,
long-term earnings growth potential, and greater diversity to earnings,
and a more competitive cost structure. Our combination will provide
shareholders and customers with more value and employees with better
opportunities than really either company could have achieved on a
standalone basis.
Now I turn it over to Rich Marsh to give you some of the details
with respect to the merger. Rich.
Richard Marsh
Thank you, Pete, and good morning everybody. Very much appreciate
you taking the time to be with us on this call this morning. I'm
delighted to briefly summarize the major terms of the transaction today
and discuss how these will produce value for our shareholders.
Under the agreement, GPU's shareholders will receive the equivalent
of $36.50 for each share of GPU common stock that they own - payable in
cash or in FirstEnergy common stock, so long as FirstEnergy's stock price
is between $24.24 and $29.63. Each GPU shareholder will be able to elect
the form of consideration they wish to receive, subject to pro-ration, so
that the aggregate consideration to all GPU's shareholders will be 50%
cash and 50% FirstEnergy common stock.
Each GPU share converted into FirstEnergy common stock will receive
not less than 1.2318 and not more than 1.5055 shares of FirstEnergy
common stock. This ratio will be determined by the average closing price
of FirstEnergy stock during the 20 day trading period ending on the sixth
trading day prior to the close of the merger. The stock portion of the
consideration is expected to be tax free to GPU shareholders. Each GPU
share may be converted into $36.50 of cash, also subject to pro-ration.
<PAGE>
The transaction will be accounted for as a purchase. Based on
current book values, goodwill from the transaction is expected to be
approximately $1.1 billion. We anticipate that that amount will be
amortized over 40 years.
The companies expect cost savings from the merger to be
approximately $150 million per year. These savings will come from the
elimination of duplicative activities, improved operating efficiencies,
more efficient use of FirstEnergy's generation assets, and the
combination of the companies' work forces.
We will seek to minimize the effect of work force reductions through
hiring limits, attrition, and separation programs. All labor agreements
will be honored, and in addition we will continue ongoing efforts to
improve efficiencies and reduce costs under way at GPU.
The companies also expect to achieve revenue growth from increased
sales of electricity, natural gas, and telecommunications services in
unregulated markets, and also from the combination of our mechanical
contracting and construction operations. Our strategy will remain firmly
focused on our 13 state target region. In that regard, we support GPU's
continuing program to divest certain of its international holdings.
The combined company expects to adopt FirstEnergy's current annual
dividend of $1.50 per share of common stock. In addition, both companies
plan to continue their existing programs to repurchase common stock. To
date, FirstEnergy has repurchase 9.9 million shares of the authorized
15 million shares in a three-year program, which ends in 2001. GPU has
repurchased approximately $300 million worth of common stock in its
repurchase program of $350 million. Financing for the cash portion of
the transaction is expected to come from a combination of public debt and
bank financing.
The transaction is conditioned upon, among other things, the
approval of each company's shareholders and various regulatory agencies.
Any actions in Ohio, Pennsylvania, and New Jersey that may be needed to
complete the merger will be undertaken as required. FirstEnergy intends
to register as a holding company with the SEC under the Public Utilities
Holding Company Act of 1935, and we expect that the merger can be
completed within 12 months.
I'm very excited about the opportunities that this transaction
offers for our shareholders and look forward to telling you about these
in more detail soon. Right now, I'd like to turn the call back to Pete.
<PAGE>
PB: Thanks, Rich. Just a couple more pleasantries here. In terms of
outlining for you some of the governance issues. Upon the closing,
Fred Hafer will become Chairman of FirstEnergy until his retirement
at age 62. I will become Vice Chairman and remain Chief Executive
Officer of FirstEnergy. I will also lead the merger integration
team that will soon be formed. The Board of Directors of the new
FirstEnergy will consist of 10 members from FirstEnergy's Board and
six from GPU's Board. After the combination, FirstEnergy will
remain headquartered in Akron, Ohio, but certain functions will
remain in New Jersey. It is anticipated that the electric utility
operating companies will retain their names and their principle
officers will remain at their current locations.
That's really a brief summary. I hope the information that we've
provided you today drives home the power of this combination. We think
it offers far greater growth and shareholder value than we could've
achieved on a standalone basis. We think it's a win-win for both
companies. It provides for near and long-term financial growth for a
substantial cost savings and we think for enhanced revenue opportunities.
We've done this before. We have every confidence that our management
team's proven track record and leadership will make our new merger really
a great success.
Again, ladies and gentlemen, Fred is on his way. He's not here yet,
but we would like to, at this point in time, open the program for your
questions. Hopefully, if Fred arrives before we're done with our
questions, we can also ask him to say a few words. So we'll turn it over
to your questions now.
Questions and Answers
OP: Thank you. Ladies and gentlemen, we will now begin the question and
answer session. If you have a question, please press the "1"
followed by the "4" on your telephone. You will hear a three-tone
prompt acknowledging your request. If your question has been
answered and you wish to withdraw your polling request, you may do
so by pressing the "1" followed by the "3". If you are on a
speaker-phone, please pick up your handset before entering your
request. One moment, please, for the first question.
Your first question is from Avi Lavi from Sanford Bernstein. Please
proceed with your question.
<PAGE>
AL: Yes, hi. Two questions. One is any thoughts about what you're
going to do with the international assets that GPU is holding?
RM: Hi, Avi, this is Rich.
AL: Hi Rich.
RM: Yes. You know, as I mentioned, our strategic focus will remain on
the 13 state target region that we've identified in the past. So we
do support that GPU's ongoing program to sell certain of its
international assets. So I would expect that that program will
continue based on market conditions.
PB: They also have some very positive assets that are contributing
substantially to their earnings. They are not necessarily a part of
their plans for divestiture at this point in time.
AL: So you might keep some of the international assets.
RM: That's a possibility, Avi, yes.
AL: So just a technical question on debt. Is the goodwill of
$1.1 billion, is that based on the current book value of these
assets on GPU's books or based on your estimate of market value?
RM: That's based on current book value, Avi. It is possible that we
would write other assets down under purchase accounting. Obviously
there's two parts to that, though. The depreciation expense from
the lower book value would also result(?), and we feel that those
two entries would largely eliminate each other. So it shouldn't
have an impact on earnings if we do end up writing down more than
that $1.1 billion based on current book values.
AL: Okay. The other question is what happens if FirstEnergy stock goes
above or beyond the collar that you've put on it?
RM: This is a fixed price transaction with a 10% collar, Avi, so to the
degree that stock price goes down. For instance, if it went down
10% to the bottom range of the collar or up 10%, we would issue 10%
more or fewer shares. To the degree it goes beyond that collar, it
would stay at the bounds, at the +10% or the -10% number of shares
outstanding. There is no provision in the transaction if the stock
does go below the 10% level, there is no provision for the
transaction not to occur, however.
AL: Is there a breakup fee?
<PAGE>
RM: There is a breakup fee, yes.
AL: Can we know the number?
RM: I believe the number is $145 million plus expenses.
AL: Okay, thank you.
RM: Thanks, Avi.
OP: Your next question is from Paul Fremont from Jeffries & Company.
Please proceed with your question.
PF: Yeah, first of all, congratulations on the deal. Second, can you
describe where the savings are going to come from, both in terms of
regulated and non-regulated businesses? Can you share with us some
of the assumptions about whether there would be any sharing of the
portion of savings that are attributed to the regulated side? Can
you give us a sense in terms of the breakdown between labor and
other sources as to where those savings are coming from?
PB: Yeah, Paul, we have not yet done a detailed analysis of all the
savings opportunities. We'll be putting together a team very
shortly. However, we've really looked at what other transactions
have been able to achieve, and also from our experience and our
prior merger. Therefore, we think conservatively estimated that
we're looking at roughly 5% synergies with respect to non-generation
O&M costs. Again, we have not allocated those dollars, but I think
you can look at other transactions to estimate how they might come
out.
PF: You mean in terms of between regulated and non-regulated or between
some sharing assumption between shareholders and customers?
PB: Well, actually I was thinking of neither. I was thinking of the
allocation between O&M and capital.
PF: Oh, okay.
PB: That was what I was speaking of. Again, we haven't gotten into the
actual synergies between regulated and non-regulated. Obviously
many of the costs will probably be the so-called shared services
kinds of costs that will be allocated between the two entities.
<PAGE>
PF: So in modeling this, should we assume that most of those savings
flow through the shareholder or should we assume some sharing is
likely to be imposed in the regulatory jurisdictions?
RM: I think.
PB: Go ahead, Rich.
RM: I'm sorry, Peter. I was just going to say, Paul, I think most
people for modeling purposes assume a convention that there is some
sort of sharing obviously. You know, we don't know how that will
actually be. But I would suggest to use the typical sort of
conventions that people use for this purpose, just with the caveat
that obviously sharing occurs on the regulated side as opposed to
the non-regulated side.
PF: Alright. At this point, you don't have a breakout between regulated
versus non-regulated.
RM: As Pete mentioned, we haven't completed the detailed synergies study
at this point.
PF: Okay.
RM: Thank you, Paul.
OP: Your next question is from Kit Konolige from Morgan Stanley. Please
proceed with your question.
KK: Hi. Good morning, guys, congratulations.
RM: Thank you, Kit.
KK: I was wondering if you could give us a little more detail on your
thinking about how your generation position, which is long and
under-utilized in certain aspects, fits with the short position that
GPU created for itself?
RM: Thank you, Kit. That's really one of the exciting parts of this
transaction. As you mentioned, the utilization of our generation
fleet, particular the fossil units, has been impacted by the
improved reliability of the nuclear units. During off-peak periods
of time, we will now have the ability to generate and sell more
power to the GPU customer base.
This will allow these units to operate more efficiently, and allow
them operate as base load units as opposed to low-filing or cycling
units, which will reduce our O&M costs, makes these units more
thermally efficient, and allow us to capture more generation
<PAGE>
revenues as well. So there's a number of benefits to this.
Obviously this also helps to contribute to mitigating their net
short position.
We also have some new generation assets that will be coming online
over the next several years, about a little over 1,100 megawatts of
peaking generation that will be coming on between this summer and
the year 2003. Those generating assets as well will be available to
help us meet our combined customer load in the service territories.
KK: Thank you.
RM: Thank you.
OP: Your next question is from Karen Roth from UBS Warburg. Please
proceed with your question.
KR: Hi. Can you discuss the corporate structure a little bit further?
Specifically, will GPU be a subsidiary of FirstEnergy with its
remaining subs intact?
RM: GPU will be merged into FirstEnergy. We expect that the GPU
operating companies will remain in their present headquarter
locations, will retain their corporate identity as a FirstEnergy
company.
KR: Okay, so all of this present subsidiaries of GPU will become
subsidiaries of FirstEnergy.
RM: Yes, that is correct, Karen.
KR: Okay. Do you have a breakdown of your customers in terms of
electric and gas?
RM: Not at my fingertips, but I'd be glad to get back to you with that.
KR: Okay, thanks.
PB: We have, as I recall. You know, most of our gas customers are large
commercial and industrial customers, and it's my recollection we
have approximately 44,000 natural gas customers. Obviously the bulk
of our customers here will be electric customers of some 4.3 million
plus. However, we hope to grow that gas company number.
KR: Okay, thanks.
PB: Gas customer number, I should say.
OP: Your next question is from Doug Preiser from McDonald Investment.
Please proceed with your question.
DP: Good morning, Pete, it's Doug Preiser.
PB: Yes, Doug.
<PAGE>
DP: A couple of questions. First of all, I'd like to go back to the
foreign divestiture question. You mentioned that you would keep
assets that are delivering excellent earnings. Am I to assume then
that Midlands would be a keeper rather than something that you would
look to sell?
PB: You know, at this point in time, it's very early in the process.
What were saying is that we fully support GPU's strategy that they
have underway with respect to certain divestitures of those assets.
At this point in time, we don't see any reason to make any real
comment about Midlands. They're earning money, they're contributing
a large segment to GPU's earnings, and we'll just have to look at as
we go forward.
DP: Okay. Then getting back to Rich's answer on the provider of last
resort issue, he mentioned that the improved new performance has
helped free-up coal availability. Could you give us some round
numbers around that? You know, how many megawatts do you think that
you have available on, Pete, to help handle the polar risk outside
of what the new generation's coming on?
RM: I can try to put some bounds around that, Doug. I mean over the
last year, nuclear's produced about 40% of our total generation.
That compares with about 34% in the prior year. It only makes up
31% of our total capacity, so it's putting out more output than is
proportional.
Right now, our fossil fleet has been running at capacity utilization
rates probably around the 55% to 60% range. Obviously the answer to
your question will depend on how high we can raise that. Certainly
we would hope over the next several years we can move that up
towards the 70% range and thus free up some significant more
megawatts that we'll be able to sell into the Pennsylvania
marketplace.
PB: And a rough estimate would be several hundred megawatts there, as I
recall.
RM: Yes, on-peak.
PB: Right.
DP: Several hundred?
PB: Yes.
RM: Several hundred on-peak and more than that off-peak.
<PAGE>
DP: Okay. Then could you give us what your assumptions are on the debt
costs from an interest rate perspective and whether that's floating
rate initially, fixed? I mean just give us some structure on the
debt.
RM: Yeah, we took a pretty simple approach to that, Doug. We assumed an
8-3/4% fixed rate for our internal modeling purposes.
DP: But that's not where you'll end up initially, though, correct? I
mean you'll do that with short-term stuff.
RM: Yeah, that's very likely.
[overtalking]
DP: . into over time.
RM: I'm sorry, Doug.
DP: It pays into that rate over time.
RM: Yeah, I mean exactly how we do this is going to be a little bit of a
tactical decision based on market conditions at that point in time.
But for our modeling purposes, we've just been assuming a
straightforward 8-3/4% fixed debt rate.
DP: Okay. Just finally, based on initial numbers, let's just assume
that the first full year of the merger is 2002, would you have a
problem if we said that it was at least 3% to 5% accretive in the
first year to what's FE's standalone earnings would be?
RM: No, I don't have a problem with that, Doug.
DP: Okay. Thank you very much.
RM: Thank you.
OP: Your next question is from Greg Orrill from Merrill Lynch. Please
proceed with your question.
SF: Yeah. Hi, gentlemen, it's Steve Fleischman.
RM: Oh, hey, Steve.
SF: Hi. A couple of questions. First, could you give us some sense of
the capital structure of the new company at closing of the merger?
RM: Sure. Initially at closing we are picking up about just slightly
over $2 billion of acquisition debt. So the capital structure will
be about 65%-66% debt as a percent of total capital at closing. We
would anticipate, Steve, that that would be reduced relatively
<PAGE>
quickly, probably with debt redemptions averaging in excess of
$600 million over the first two or three years. So that we would
expect by the end of the third year post-merger, we would be at
something closer to 55% to 56% to 57% debt.
SF: That's $600 million per year of debt redemptions?
RM: That's an average over that time span.
SF: Okay. Second question is with respect to this issue about managing
the generation better, just so I understand. At peak you have
limited capability to sell excess into GPU?
RM: Yes, that's true.
SF: Would it be so most of this is kind of off-peak or area where
hopefully you'll more opportunity to sell into I guess a higher
priced market?
RM: It'll also to, yeah, use existing assets more efficiently. We'll be
able to take the assets that we have now, run them more, run them
better, and sell that and capture that incremental margin, which(?).
[overtalking]
SF: I mean are there any kind of either transmission. Could you go into
any transmission issues between the two, as well as any
environmental issues about running your plants at a higher capacity
factor?
RM: I'm certainly not a transmission guru, but those folks here who are,
Steve, tell me that that doesn't present any problems that are
insurmountable as far as getting that generation to the East.
PB: In addition, Steve, one of the big things here is that we do have
diversity, both in terms of geography, customers, and often times
weather. In fact, some of the peaking capacity that we'll be
putting on we do think would be available to meet some of their
peaks at times when probably the Western part of our territory at
that point in time may not need it as badly.
SF: Okay.
PB: Again, we're looking to put on some combustion turbines, some of
which will be available to go into that market relatively soon.
<PAGE>
SF: Okay. I'm just trying to understand why it would've been different
if this is supposed to be an open access market, why it would've
been different as a merged company than standalone pursuing the same
strategy.
RM: I guess because you have.
[overtalking]
SF: I thought the issue was there was a lot of constraints between ECAR
and PJM.
RM: In some areas there are. You know, we are interconnected in
Northwest Pennsylvania. I think the big issue here, Steve, is that
we will "own(?) the customer." Those customers will be FE customers
and that gives us a lot more options for how we source the
generation.
SF: Okay.
PB: Again, I mean we're not saying that we're going to supply all
capacity. Some capacity will be managed just as it's managed now.
It'll come from the sources it's coming from now or from the areas
that it's coming from now. We may in fact try to sight some of our
new combustion turbines within that market. Again, at various
periods in time, we think that the transmission system can
accommodate the kinds of power that would be sold into that
marketplace.
SF: Okay. One last question on regulatory approvals. We've had I guess
one deal recently go through Pennsylvania. There hasn't been any
deals I think recently in Ohio or New Jersey. Just curious since
this got pre-leaked, what the initial political regulatory reaction
has been and what, if any, specific guidelines there might be under
the dereg laws on merger approvals in those states.
PB: I'm not sure that I've seen any official comments other than there
was a quote by the Chairman of the Ohio Commission in one of our
papers saying it seemed reasonable to him. I'm not sure if we've
seen really any other quotes in the newspapers from any elected
officials or regulators. We're very hopeful that in terms of
providing additional reliability to customers, making us a stronger
company. The two of us together, we think that should be a positive
for both regulators as well as legislators, and ultimately for
customers. But we don't have any specifics on that at this point in
time.
SF: Thank you.
<PAGE>
RM: Thanks, Steve.
OP: Your next question is from Mark Luftig from WH Reaves. Please
proceed with your question.
ML: Hi. Two questions, please. One, do you need Ohio approval for the
merger? Second, are there any plans to do joint ventures of the
non-regulated pieces before the merger is completed?
PB: Well, to the second question, I can't say that we've gotten into
that yet, Doug. In many ways we are doing joint ventures with
respect to e-commerce activities, telecommunications activities.
Those are forms of joint ventures. But beyond that, we really
haven't gotten into the specifics.
With respect to approvals, particularly as you ask about in Ohio,
I'll ask our General Counsel, Leila Vespoli, who is with us to
comment on that.
LV: No, I don't believe the transaction of structure would require
approval of the Commission. However, in some prior transactions
where jurisdiction has been questionable, parties have brought it to
the Commission in abundance(?) of caution. So as to whether there
will be any type of filing made is still an open question.
ML: Okay.
RM: Thanks, Mark.
OP: Your next question is from Dan Poole from Matcity Investments.
Please proceed with your question.
DP: Hi guys, congratulations. I think everything's been answered, but,
Pete, maybe if you could elaborate on the interconnectability of the
two systems. Sort of make us feel good that there's absolutely no
transmission issues between the two areas. Are you physically
interconnected to them?
PB: Yeah, you know, you can never say never to anything. All I can tell
you is we've done due diligence, we've talked to our transmission
people, we are definitely interconnected directly with GPU in
Northwestern Pennsylvania. From what we can tell, the amount of
power that we'll need to transmit to the East, there seems to be
adequate transmission capability at this point in time from what we
can gather.
DP: Super. Thanks.
<PAGE>
RM: Thank you, Dan.
OP: Your next question is from David Frank from Zimmer Lucas Partners.
Please proceed with your question.
DF: Yeah, hi. Good morning, guys, congratulations.
PB: Thank you.
RM: Thanks, David.
DF: I just want to ask you, are there any walk-away provisions in this
merger?
PB: Walk-away provisions? In I guess traditional kinds of definitions
of that.
LV: Speaking of the termination fees, yes, there are two specific
termination fees. There's a termination fee of $25 million with
respect to a non-curable(?) breach, and the one Rich alluded to
earlier, the $145 million, the more standard typical termination
fee.
DF: Okay. What should we use for a targeted closing date for the
merger?
RM: Our expectation and our hope, David, is that we can get this deal
done in about 12 months.
DF: 12 months, okay. Rich, you talked about $1.1 billion of goodwill
earlier.
RM: Yes, David.
DF: Is that all from paying above book value for GPU? Are you including
the write-down of maybe some other assets as part of the purchase
accounting and write-up of goodwill in that number?
RM: There was a little bit of that, David. It's from writing down
assets. Most of it results from existing book value, yes, paying
above book value.
DF: Do you anticipate taking in further write-downs?
RM: That's possibility. It depends on what assets they may divest
between now and closing, but that's certainly not out of the realm
of possibility.
DF: Just one more question. What are FE's current shares outstanding
and how many shares do you plan on repurchasing prior to the merger
closing?
RM: We've already repurchased about 9.9 million out of authorization of
15 million. That'll somewhat be a tactical decision. We've been
accelerating the program as you know, David. So over the next year,
which is the expected timeframe, I would anticipate we would have
most of that program completed.
<PAGE>
As far as the exact number of shares that we have outstanding, does
somebody have.
SP: 229.
RM: About 229 million.
DF: 229 [million]?
RM: Yes.
DF: Thank you.
RM: Thank you, David.
OP: Your next question is from David Reynolds from Morgan Stanley.
Please proceed with your question.
DR: Good morning, gentlemen, congratulations.
RM: Thank you, David.
DR: Just a couple of quick questions. They've pretty much already been
asked, but I just want to make sure I have the details correct. It
sounds like Ohio doesn't have explicit authority to approve the
merger, but you're possibly anticipating approaching them just to be
safe. Is that the same situation with Pennsylvania and New Jersey?
What are your expectations for what you're required to do there?
RM: I'm sorry.
PB: The question had to do with. I'm sorry. We just had some very nice
guests arrive in the room. So let me restate the question, so
everyone can hear it here. The question was we've talked about Ohio
approvals, what do we need from either Pennsylvania or New Jersey in
terms of regulatory approvals? Leila.
LV: We will need approvals there.
DR: Okay. So you'll have to make filings for those states.
PB: Correct.
RM: That's right, David.
DR: Okay. Last question, just real quickly. With regard to the
improved generation performance and possibly higher load factors, is
the benefit really coming from the difference between the whole sale
market rates that you have been receiving and the retail rates that
you're going to get from GPU's default service? I mean surely with
improving
<PAGE>
performance that we've seen over several quarters, you've
been generating the extra output and selling it into the wholesale
market. So is the upside because of a better revenue number that
you're going to get from the GPU default service numbers?
RM: I mean that's part of it, David. There's several elements to the
answer I guess. Number one, is that it does allow us to better
utilize the existing resources we have, generate more kilowatt hours
out of the same generation base because we'll have a larger customer
base to spread them over. Also get some very attractive O&M savings
and efficiencies because these units will be more thermally
efficient. These units were designed to be operated as base load
units, not to be cycled up and down or to be load following(?).
Getting them up to speed and temperature and operating them that way
makes them more efficient, makes O&M costs less, and improves their
reliability. So there's a number of elements to that answer.
DR: Right. I guess the question I'm trying to get to, Richard, is in
terms of the extra kilowatt hours, weren't these kilowatt hours that
you would have been producing and selling into the wholesale market
anyway? Instead you just have an embedded short position or
embedded customer base to move them to.
RM: No, I wouldn't agree with that, David. They were kilowatts that
weren't being generated.
PB: We just think they can be generated now, at a profit.
DR: Okay.
PB: Hey, before we lose some of you. I know we've been going here for
45 minutes or so, but I'm pleased to say that Bruce Levy, the Chief
Financial Officer of GPU, has arrived as has their Chairman,
President, and CEO of Fred Hafer. I would just ask Fred, we kind of
truncated some of the things he was going to say already, but just
ask him if he might like to say a few words. And if you might have
a question or two for him that would be great at this point in time.
Fred.
FH: Okay. Thank you. Thank you very much, Pete, and thank you all for
your patience and your endurance as we tried to get here. I guess
it's needless to say, this is a very exciting day for me personally
and for the entire GPU organization. We're extremely pleased to
have been able to find a partner such as a quality organization like
FirstEnergy.
<PAGE>
I think that the combination gives our shareholders - GPU
shareholders - obviously a meaningful premium over their stock price.
But maybe even more importantly, it provides GPU shareholders with a
significant value in the near-term and also an opportunity to participate
in what we believe will be some significant upside potential of what is
.[tape skips]. we also believe to be a compelling transaction. It gives
our employees an opportunity to become part of a larger, more
diversified, exciting organization.
I'm particularly proud to say that FirstEnergy, as I've come to know
them, are like GPU, is a company that clearly takes an active role in all
the communities in which it's located and which it serves. That is
something that's been very important to GPU as well.
Some might question how we eventually arrived at this decision,
although others I guess might view it and understand that it was previous
obvious and compelling. It certainly should come as no surprise to
anyone that I, like a number of you, who are on this phone call have
been, for some time, very disappointed and dissatisfied with GPU's stock
performance. We have been looking for strategic ways to enhance our
value and to improve that.
For some time now, our Board has been working and studying strategic
options that would be available to the company, and came to the
conclusion that the best way to serve our shareholders and indeed all of
our stakeholders in this process, was to investigate what opportunities
might be out there for a partnership or a sale of the company. We've
been involved in what is a pretty rigorous process, looking for the right
partner, and again, as I said at the very outset, I'm just delighted to
be able to announce that, in my view, we found not only the right
partner, but a perfect partner for GPU in FirstEnergy.
Pete and I have not been long-time friends, but we've known each
other socially and professionally for some time. I've enjoyed that
relationship. We're therefore kind of friends as well as neighbors -
neighbors as far as our companies go.
For those of you who aren't maybe as familiar with GPU as you might
be with FirstEnergy, we are a public utility holding company that has
been in business now for
<PAGE>
almost 55 years. Our core business is the electric delivery business in
the United States. We serve dominantly in Pennsylvania and New Jersey,
covering about half the land area of those two states, and delivering
electricity to about 2 million customers.
We also have substantial holdings internationally, as some of the
questions indicate you're already aware, including a distribution company
in the U.K. The Midlands Electric Company, which itself serves about
2 million customers. A gas transmission company in Australia and several
independent power projects, both in the U.S. as well as around the world.
We also have an electric distribution holding company in Argentina.
Other than the distribution companies in South America and the U.K.,
we have been involved in a process of trying to divest of those. As you
heard earlier from Pete, FirstEnergy is aware of that and supports our
efforts as we go forward through the transition phase.
We have been very focused on trying to build a non-regulated
component of the GPU systems, specifically focusing on construction
activities, especially construction utility construction and piping, as
well as the new kind of emerging field of telecommunications and various
facets of that. Those businesses fit perfectly with the efforts and the
focus that FirstEnergy has.
Our access to FirstEnergy's generation, which has been the subject
of a number of questions most recently, and its expertise that
FirstEnergy has in providing cost-effective supply options in competitive
markets, I believe is going to be a tremendous advantage to GPU in our
efforts to accommodate customers who continue to rely on us not only for
the delivery of their electricity, but for the supply of that
electricity. Through FirstEnergy, we are going to be able to continue to
play an important role in the economic health and the well-being of New
Jersey and Pennsylvania, both as a significant, continuing employer and
as just a responsible corporate citizen. So we will continue the strong
traditions that both of our companies have built up for supporting local
communities through our charitable contributions, through extensive
volunteerism and volunteer programs of our employees.
<PAGE>
In closing, let me just say if it isn't obvious with what I've said
already, let me reiterate that in my view FirstEnergy is clearly the
right fit for GPU in terms of our strategic objectives, in terms of our
cultures, in terms of our core values, in terms of our geography and the
locations of our systems and the businesses in which we're involved. I'm
extremely optimistic and excited and proud that we're able to put these
two great companies together. Thank you, Pete.
PB: Thank you, Fred, very good. We understand that. We appreciate
Fred's comments and glad that he and Bruce could both get here. We
understand there are a few more questions on the line, so why don't
we take a few more before we cut it off.
OP: Thank you. Your next question is from James Vhalacker from Silcap.
Please proceed with your question.
JV: Good morning.
PB: Hey, Jim.
JV: Just a quick question regarding the future capex. I guess now that
Fred's there also, could you give us sort of an idea of what the
breakdown is between FirstEnergy and GPU and also break it down
between sort of maintenance and growth capital?
RM: In general, I can give you sort of an overview, James. I mean
basically the domestic utilities we would expect to have capital
expenditures, you know, generally in say in the high three hundreds
to low four hundred million per year kind of range. Okay? Total
capex for the companies combined would probably be in the $800
million plus range over the coming years.
JV: Okay, great.
FH?: Obviously that's another area that we'd like to attack with our
transition team, to see whether or not we can find some savings
maybe on systems if not facilities, if you will, that we can save on
as we go forward here with respect to synergies on capital items as
well.
JV: Thank you very much.
RM: Thanks.
OP: Your next question is from Ed Kressler from Angelo Gordon. Please
proceed with your question.
<PAGE>
EK: Good morning and congratulations. Real quickly, just some
housekeeping details. Is the deal conditioned in any way on
financing?
RM: No, it's not, Ed.
EK: It's not, great. Is the deal additionally conditioned in any way on
any of the GPU planned asset divestitures?
RM: It is not, Ed.
EK: It's not, great. Can you just talk a little bit about the nature of
the FCC approvals that are going to be required?
RM: Certainly. We might ask Leila Vespoli to answer that question.
PB: SEC approvals, is that the question?
EK: Yes.
PB: Or did you say FCC?
EK: I said FCC.
PB: FCC.
LV: FCC. There will be approvals required as there was with the merger
of Ohio _________ and Centerior.
SP: Divestitures.
LV: FCC?
SP: Yes, FCC.
[overtalking]
LV: Most license communications, a transfer of licenses in that regard?
EK: Yes.
LV: Yes, we will need approval for that.
PB?: But we don't really see that as a significant item, however.
LV: No.
EK: Okay, but.
LV: No, not at all.
EK: It primarily relates to transfer of licenses held at GPU?
RM: That's right, Ed.
LV: As I understand it right now, yes.
<PAGE>
EK: Okay, great. Just two more quick ones. In terms of. This was
already asked, but I don't think the question was understood. Is
there any walk-away price at which either if the price of
FirstEnergy or GPU, in terms of stock price, should move beyond a
certain point that either party has the option to walk away from the
deal?
RM: There is not.
EK: There is not, great. And then the $145 million break free, is that
payable only in the event of a superior proposal for GPU or is it
payable both ways?
RM: It's payable.
[End of side 1]
[Beginning of side 2]
OP: . Credit Suisse First Boston. Please proceed with your question.
PP: Hi, how's it going?
RM: Okay, Paul.
PP: I wanted to ask you some balance sheet questions here. You
mentioned 65% to 66% debt at the close of the merger. Does that
conclude the lease obligation bonds?
RM: Yes it does, Paul.
PP: Okay. And then the second part was, of the total amount of equity
that you have with the company, what would be the total dollar
value, roughly speaking, of goodwill?
RM: Goodwill we're saying is about $1.1 billion.
[overtalking]
PP: But don't you also have some goodwill from the previous transaction?
You've got about $2 billion I think at FirstEnergy. I was wondering
what it was at GPU. Is it like $3.
RM: It would be about $3 billion in aggregate, Paul.
PP: Okay. And that would be out of how much of total equity?
RM: $9 billion.
PP: Out of $9 billion of total equity.
RM: Correct.
PP: Okay. And then I guess for this question that we're coming up with,
that people keep coming back to, is the GPU store(?) position how
this aids GPU's store position. Right now, GPU can buy power in the
off-peak market, isn't that correct? And you guys can
<PAGE>
sell into the wholesale off-peak market? I guess what we're trying
to figure out or what some of the questions seem to be aimed at is
what exactly is the synergy, if you guys are able to currently sell
into the off-peak market, you know, to the wholesale market and
they're able to buy in the wholesale market, where is the synergy
that's associated with that? If right now it seems like you guys
are able to do this without the transaction.
RM: Let me take another stab at this. I tried it a couple of times.
Apparently I haven't gotten the message across, Paul. It really
comes to our relationship with the customers that we will have. We
will not have more customers to sell to. We will be able to run our
fossil generation more and generate more than we have in the past,
which will allow us to not only get incremental margin and revenues,
but also to get some O&M efficiencies from running those units more
than they are running right now.
PP: But couldn't you just buy the power in the wholesale market to serve
those customers? I mean that's what I guess is confusing us. I
mean now you've got access to these customers, can't you just simply
buy the power in the wholesale market to serve them? I mean why do
you now generate it I guess is what's sort of confusing.
RM: To the degree that it's more cost effective, we generate rather than
buy. But could we buy in the wholesale market? Yes, obviously.
PP: So you don't currently sell into the wholesale because I guess the
price doesn't support it. I guess what I'm wondering is why would
it be that you can now. Do you see what I'm saying? Why would you
now sell. Why would you now run your plant? Are you concerned(?)
that the price of power would go up in the wholesale market? Do you
see what I'm saying? I mean half a dozen, six of the other so to
speak, is what it seems like.
RM: Okay. Tom Navin, our Treasurer, Paul, had a comment that he wanted
to make.
TM: [harder to hear, since further away from microphone] Paul, one of
the benefits that we see of the combination is that it really
enhances the flexibility of how we generate and when we generate.
If we were to say try and buy from the _________ market or try buy
it forward(?), we would probably be buying it higher price than
having the additional generations, especially the ability to run the
generation at night to serve the customers that we will then own
gives us that flexibility.
<PAGE>
We'll be able to run the units at a higher capacity factor during
the off-peak night time hours and then be available to make peak on the
next day with those same units. Rather than how we run those units today
on a standalone basis, which is where we're cycling(?) those major units
that aren't running base loads down to very low levels or maybe off at
night.
PP: Because now you've got customers who are willing to pay more at off-
peak, is that what the idea is?
TN: Well, we'll just have customers that we can use during those off-
peak hours to run our generation units at a higher level. Right
now, we don't have those customers to serve during those off-peak
hours, so we have to cycle those units down to lower levels.
PP: And how does GPU serve those customers at off-peak hours? They buy
the power in the wholesale market, right?
RM: Yes.
PB?: Or they have contracts now, I.
RM: Right.
PB?: The other thing that we can also point out here is that it's almost
like a. I don't want to use the term vicious circle. It's a
positive circle in that the more we produce, the lower our costs per
unit are and the more competitive we become. And also the points
that Tom made about efficiencies of not cycling plants, running them
more full-load, just brings down the overall costs and we think will
make us much more efficient overall than we otherwise would've been.
PP: Okay. Thank you very much.
RM: Thanks, Paul.
PB?: We also wanted to make a. I think Leila wanted to make one
clarifying point.
LV: Yes, if I could. When it was answered earlier to the question of
whether there was a bilateral termination fee and it was indicated
that it was, that is true for the $25 million I had mentioned. With
regard to the $145 million, that would just be an amount that would
be payable to FirstEnergy.
PB: Okay, we had. If there is one more question, we'd like to take that
now and then we'll cut it off.
<PAGE>
OP: Your final question is from Dan Jenkins from State of Wisconsin
Investment Board. Please proceed with your question.
RM: Hello, Dan.
DJ: Hi. Congratulations on the deal. I had a couple of things. First
of all, I was wondering if you have the dollar amount of the assets
that GPU still has to divest.
RM: We don't have a specific dollar amount. I think exactly what they
do with some of these international assets depends on market
conditions. So exactly what may be sold and when they be sold will
in part be a reflection of market conditions in general. So I don't
think I can give you a definitive answer on that.
PB?: Maybe Bruce could a little color to that, though.
BL: The assets that we're currently selling fall into three categories.
The gas distribution or gas transmission business in Australia,
which has an estimated value of about $850 million to $900 million
Australian dollars. We would net from that about $100 million U.S.
after repayment of debt.
The IPP assets in the U.S. have an estimated value in. We're in the
middle of a bid process, but it's greater than book value and the
book value is about $130 million. The bids will be above that. But
that bid process won't be completed until later in the third
quarter.
The international IPPs, which will be sold over the next six months
to a year, probably have a combined value of about $200 million U.S.
Some in South America and the rest in Europe and in Asia.
So those are the total proceeds we could expect to get from those
things, but we'll be selling them over the next 12 months.
PB?: Thank you, Bruce.
DJ: Do you anticipate that those proceeds will be used to reduce the
amount of debt financing you'll need for the cash portion of the
deal?
BL: Well, prior to closing we'll use that proceed to pay off the debt at
GPU. That'll lower overall debt in the combined company.
FH: You get to the same point.
<PAGE>
PB: Thank you, Bruce. Thank you, Fred. I'm glad you both were able to
get here. Again, we want to thank all of you on the line for
joining this morning. As I said earlier, our merger with GPU we
think really is a truly compelling story. By combining our two
companies, FirstEnergy will realize improved financials we think.
We'll become the premiere supplier in our 13 state region that we
have targeted for growth. The merger enhances our generation
utilization, it may well contribute to meeting GPU supply risks. It
broadens our unregulated market opportunities. There's just more
customers out there available to us. We have every confidence that
our proven management team will provide the leadership for this
company going forward.
In addition, we look forward to seeing many of you and telling you
more about our story tomorrow. We're going to have an analyst
meeting in New York beginning at 8:15 at the Essex House at
160 Central Park South. We thank you all for joining us today.
Good day.
OP: Ladies and gentlemen, that does conclude your conference call for
today. We thank you for participating and please disconnect your
lines.
[End of Recording]
Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995
This press release 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 set forth in FirstEnergy's and GPU's filings with the
SEC, including 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 most recent reports filed with the SEC.
Additional Information and Where to Find It
In connection with the proposed merger, FirstEnergy Corp. and GPU, Inc.
will file a joint proxy statement / prospectus with the SEC. INVESTORS
AND SECURITY HOLDERS ARE ADVISED TO READ THE JOINT PROXY STATEMENT /
PROSPECTUS WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAIN IMPORTANT
INFORMATION. Investors and security holders may obtain a free copy of the
joint proxy statement / prospectus (when available) and other documents
filed by FirstEnergy and GPU with the SEC at the SEC's Web site at
http://www.sec.gov. Free copies of the joint proxy statement /
prospectus, once available, and each company's other filings with the SEC
may also be obtained from the respective companies. Free copies of
FirstEnergy's filings may be obtained by directing a request to
FirstEnergy Corp., Investor Services, 76 S. Main St., Akron, Ohio 44308-
1890, Telephone: 1-800-736-3402. Free copies of GPU filings may be
obtained by directing a request to GPU, Inc., 310 Madison Avenue,
Morristown, New Jersey 07962, Telephone: 1-973-401-8204.
FirstEnergy, its directors, certain executive officers, and certain other
employees (Thomas M. Welsh, manager of Communications, and Kurt E.
Turosky, manager of Investor Relations) may be deemed under the rules of
the SEC to be "participants in the solicitation" of proxies from the
security holders of FirstEnergy in favor of the merger. FirstEnergy's
directors, and executive officers beneficially own, in the aggregate,
less than 1% of the outstanding shares of FirstEnergy common stock.
Security holders of FirstEnergy may obtain additional information
regarding the interests of the "participants in the solicitation" by
reading the joint proxy statement/prospectus relating to the merger when
it becomes available.
GPU, its directors (Theodore H. Black, Fred D. Hafer (Chairman; CEO and
President), Thomas B. Hagen, John M. Pietruski, Robert Pokelwaldt,
Catherine A. Rein, Bryan S. Townsend, Carlisle A.H. Trost, Kenneth L.
Wolfe and Patricia K. Woolf), certain executive officers (Ira H. Jolles
(Senior Vice President and General Counsel), Bruce L. Levy (Senior Vice
President and CFO) and Carole B. Snyder (Executive Vice President
Corporate Affairs)) and certain other employees (Jeff Dennard (Director
of Corporate Communications), Joanne Barbieri (Manager of Investor
Relations) and Ned Raynolds (Manager of Financial Communications)) may be
deemed under rules of the SEC to be "participants in the solicitation" of
proxies from the security holders of GPU in favor of the merger. GPU's
directors, and executive officers beneficially own, in the aggregate,
less than 1% of the outstanding shares of GPU common stock. Security
holders of GPU may obtain additional information regarding the interests
of "participants in the solicitation" by reading the joint proxy
statement/prospectus relating to the merger when it becomes available.
