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.: 333-46444
Subject Company: FirstEnergy Corp.
SECURITIES ANALYSTS PHONE CONFERENCE CALL
OF OCTOBER 17, 2000
A P P E A R A N C E S
MR. RICHARD M. MARSH
MR. KURT E. TUROSKY
MR. THOMAS C. NAVIN
THE OPERATOR: Ladies and gentlemen, thank you for standing
by. Welcome to the FirstEnergy Corp. third quarter earnings
conference call. At this time all participants are in a
listen-only mode. A replay of this conference will be available
from 4:00 Mountain Time on October 17th until 3:00 Mountain Time
on October 24th. The dial-in number is 800-633-8284 for
domestic callers and 619-812-6440 for international callers.
Please use reservation number 16156723 to access the postview
replay. Also, the conference is available on the FirstEnergy
web site at www.firstenergycorp.com. As a reminder, this
conference is being recorded Tuesday, October 17th, 2000. I
would now like to turn the conference over to Mr. Kurt Turosky,
Manager, Investor Relations of FirstEnergy Corp. Please go
ahead, sir.
MR. TUROSKY: Thank you.
This conference call 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 most recent reports filed with the
Securities and Exchange Commission.
In connection with the proposed merger, FirstEnergy Corp. and
GPU, Inc., have filed a preliminary joint proxy statement/
prospectus with the SEC. Investors and security holders are
advised to read this joint proxy statement/prospectus and, when
it becomes available, the definitive joint proxy statement/
prospectus. The joint proxy statement/prospectus contains
important information.
Now, I'd like to turn the call over to our Vice-President and
CFO, Rich Marsh.
MR. MARSH: Thank you Kurt. Good afternoon everybody. We
appreciate you joining us today for our quarterly conference
call and I'd like to extend a special welcome to those of you
who are listening via the Internet. We appreciate everyone's
interest in FirstEnergy. Joining me today are Harvey Wagner,
our Controller, Tom Navin, our Treasurer and you just heard from
Kurt Turosky, Manager of Investor Relations. We faxed out an
earnings release earlier today, and this document might be
helpful to refer to as we go through our discussion today. The
release is also available on the investor relations section of
our corporate website. And once again, that address is
www.firstenergycorp.com. During the call today, I will review
3rd quarter results and also update you on some other key
topics. And then following that, I'll open the call to analyst
questions. So let's get started with our review.
Net income in the 3rd quarter was $198 million, or $.89 per
share of common stock. This compares to the $186
million or $.82 per share earned in the 3rd quarter of 1999 and
represents an increase in earnings of 8.5%.
A brief summary of the major quarter-over-quarter earnings
variances is included on the first page of our earnings release,
and I'll highlight these in my comments.
The major drivers behind the increase in earnings during the
period included reduced fuel and purchased power costs, gains
realized from the sale of emission allowances, and reduced
financing costs.
These were in part offset by lower electric revenues due to mild
weather conditions, increased fossil and nuclear O&M expenses,
and a reduced contribution from our unregulated businesses.
I'll talk about each of these items in more detail.
Generation sales to customers in our service territory were 1.4%
below the levels of the prior year due primarily to unseasonably
cool weather. There wasn't a single 90-degree day during the
entire summer, and that's highly unusual for our area. The month of
July, in fact, was the second coolest ever recorded in our
service territory.
The weather had a significant impact on residential sales as you
would expect, with kWh usage falling 9.5% from the levels in the
prior year. In spite of the mild weather, sales to our
industrial customers rose 2.6% reflecting the continued strength
in our regional economy.
Unregulated generation sales rose 16%, with an increase of 153%
in retail sales in the Pennsylvania, New Jersey and
Delaware markets. Being in turn offset by an 11% decline in
wholesale sales.
Combined electric generation sales to our regulated and
unregulated customers during the quarter, therefore, increased
1.2% from the same period in the prior year.
It is noted on the second page of the earnings release sales
figures are reported in two categories: generation sales and
distribution deliveries. The distribution delivery statistics
represent the total kWh's consumed by customers within our
franchise territory, regardless of their supplier of generation.
Beginning next year, January 1st of 2001, these measures will
become more important as they will indicate the degree to which
our franchise customers in Ohio have elected to obtain their
generation service from a supplier other than one of our
regulated distribution utilities.
Moving on, fuel and purchase power expenses were $69 million or
26% lower than during the 3rd quarter of 1999.
Fuel expenses decreased by $40 million, or 21%. And this
reduction can be attributed to three primary factors:
The first of which was an increase in our nuclear production,
resulting from the asset swap and the improved nuclear unit
availability. During the 3rd quarter, nuclear output was 25%
higher than during the same period last year and comprised 44%
of our total generation output.
The second factor was the expiration of the above-market Quarto
coal contract at our Mansfield plant at the end of last year,
which reduced our cost by about $25 million during the quarter
compared to the 3rd quarter of last year.
And finally, we continue to achieve significant benefits from
the optimization of the blend of coal used in our units through
the use of what we can term, "conversion economics." This
discipline, which involves matching the quality and cost of the
fuel burned to prevailing market conditions, allows us to
extract more value from the coal procurement, logistics and
consumption processes and continues to enhance the
competitiveness of our fossil fleet.
On a year-to-date basis, these factors have enabled us to reduce
our fuel costs by over $90 million during a period in which our
generation output has actually increased by 6%.
During the quarter, the cost of purchased power was $29 million,
or 38% lower than in the prior year. And that was a result of
reduced demand and increased unit availability and lower prices
in the wholesale market.
Operation and maintenance expense increased by $41 million
versus the same period in 1999, and that excludes a $33 million
credit from gains realized on the sale of emission allowances
from our inventory.
Fossil O&M expense increased by $21 million primarily due to
extensive maintenance work at several of our plants. Our
Eastlake #5 unit was out of service for 37 days in order to
repair a failed turbine blade, while Sammis Unit #6 was down for
16 days for planned maintenance to the boiler. Bayshore Unit #1
was out of service during the quarter to complete the conversion
to a fluidized bed boiler that would burn pet coke generated by
the adjoining British Petroleum refinery facility.
O&M costs also increased by $5.5 million as a result of the
portable diesel generators that were leased as part of our plan
to enhance our summer supply portfolio. Because of the mild
temperatures, these units saw little use but they were still an
important part of our risk management strategy to meet our
anticipated summer peak demand.
Nuclear O&M expense increased $23 million. About half of this
was due to the refueling outage at Beaver Valley Unit 2, and the
other half was just a result of our increased ownership in the
Perry and Beaver Valley plants following the asset swap with
Duquesne Light in 1999.
As a reminder, we had three outages during 2000, compared to two
outages in the prior year. The outage at Beaver Valley is
progressing well and we expect to get it to return to service
some time later this month. This should represent the shortest
refueling outage in the unit's history of about 39 days,
compared to the prior record of 44 days. Also, the scope of
this outage had been greater than would typically be expected
for refueling in order to allow us to continue to address the
material condition of the plant following the asset swap.
During the quarter, we accelerated depreciation and amortization
expense by $148 million under our previously approved rate
plans. This was about $25 million less than in the third
quarter of 1999, but greater than the amount we had assumed in
our budget. Year-to-date accelerations total $292 million, or
$10 million higher than during the prior year.
I'd now like to turn the call over to Tom Navin to discuss the
remainder of the financial results, as well as a few of the
noteworthy events that took place during the quarter. Tom.
MR. NAVIN: Thanks Rich. I'll start by highlighting some of
our recent financing activities.
We continue to reduce our debt costs by meeting our mandatory
redemptions with cash and through our aggressive refinancing
efforts. As a result, interest and preferred dividend expenses
were $10 million lower during the quarter and added 4 cents per
share to earnings. During the third quarter we retired $252
million of debt and preferred stock and refinanced an additional
$31 million.
On a year-to-date basis, debt and preferred redemptions totaled
$383 million, which would produce annual interest savings of $27
million. In addition, we refinanced $285 million of debt which
will reduce our interest expense by an additional $4 million
annually.
I'd also like to mention our recent credit upgrade. In
September, Moody's Investors Service upgraded the credit ratings
for each of our operating companies. This move raises the
senior secured debt of each utility operating company to an
investment-grade level, and that will reduce our future
financing costs and provide greater flexibility and refinancing
opportunities going forward. Moody's also indicated that these
ratings remain under review for possible further upgrade.
Turning now to our common stock repurchase program. During the
quarter, we purchased 1.8 million shares at a cost of $45
million, or $25.19 per share. Since the beginning of the
program in 1999, we've purchased 11.1 million shares, or about
three-fourths of the 15 million share authorized. These
purchases total $283 million for an average price of $25.56 per
share.
Moving on to the last section of our financial results, I'd like
to briefly discuss the performance of our major unregulated
business units, including our electric, gas and value added
services unit, as well as the Facility Services Group.
As Rich mentioned, the volume of our unregulated electric sales
increased significantly compared to the 3rd quarter of 1999.
However, the gross margins of these activities contributed less
to net income than last year, primarily as a result of increased
costs to procure the energy sold to our customers through the
summer, as well as increased sales and marketing costs.
As we continue to build these businesses, our customer
acquisition and sales volume is on track with expectations. We
have been successful in our unregulated sales efforts in
Pennsylvania, New Jersey and Delaware, as we have acquired
30,000 new retail customers who consumed 4.2 billion kWh's this
year. We have also sold 5.4 billion unregulated wholesale kWh's
year-to-date. On an overall basis, these sales were close to
our budgeted targets, although we scaled back our retail efforts
this summer, the cost to procure supply in these markets would
have made additional retail sales uneconomical.
Results from our national gas operations were up slightly
compared to the same period last year as both our production and
marketing organizations showed improvement. The improvement at
our MARBEL subsidiary resulted from increased natural gas and
oil production, coupled with a sharp increase in prices. In the
gas marketing segment, our sales volume increased - primarily
due to the acquisition of Volunteer Energy.
Our Facility Services Group posted a revenue increase of about
18% and backlogs exist at record levels at most units. However,
the group's contribution to net income was down approximately
$2.0 million from the third quarter of 1999. The issues
confronting the profitability of this group seem to be endemic
to much of the industry as margins have been pressured by the
tight labor market and rising personnel costs, along with what
already had been a very competitive pricing environment.
We continue to shift the focus of the facilities companies to
higher margin service projects in an effort to improve future
earnings. Currently, about two-thirds of Facility Services
revenue is derived from construction, while one-third comes from
service projects. Our goal is to reach a 50/50 mix of
construction and service projects gradually over the next four
years.
I'd like to provide updates on two key developments - our
progress towards the formation of a full profit regional
transmission organization and on our peaking unit additions.
On the transmissions front, we have completed the transfer of
our $1.2 billion of transmission assets to our wholly owned
subsidiary, American Transmission System Inc. effective
September 1. The formation of this entity positions us to move
forward with our plan to join the Alliance Regional Transmission
Organization.
I'd also like to give you a quick update on the status of our
peaking units. The first of the three gas-fired -- or the first
two, rather, of the three gas-fired 130 MW combustion turbines
at our Richland station are now generating power. Construction
of the third 130 MW unit is nearly complete and is expected to
be operational in November.
We are also in the process of adding five 85 MW units at our
West Lorain facility. Four of the five units are on site and we
do plan to have the entire 425 MW available by next summer.
Now, I'd like to return the call back to Rich to provide merger
related updates.
MR. MARSH: Thank you, Tom.
I'll give you just a quick overview on our activities regarding
the merger with GPU. The S-4 proxy was filed with the Securities
and Exchange Commission on September 22nd and declared effective
on October 13th. We plan to file the definitive proxy statement
with the SEC this Thursday, which is October 19th, and begin our
mailings of the proxy to our shareholders on the next day,
October 20th. The special meeting of FirstEnergy's shareholders
to approve the merger will be held in Akron on November 21st.
We have established an aggressive schedule regarding the
regulatory filings necessary for the merger. We anticipate that
by the middle of November, filings will have been made with the
state commissions in New Jersey and Pennsylvania as well as with
the FERC and the Department of Justice under the Hart-Scott-
Rodino Act.
In September, together with GPU, we filed joint applications
with the NRC to request approval for the indirect transfer of
control of the possession-only licenses for Three Mile Island
Unit 2 and the nearly decommissioned Saxton experimental
research reactor.
We're also moving quickly with our internal merger integration
efforts. We have announced the formation of our integration
teams that will help establish the directions of the combined
company's operations. The management sponsors for each team
have been identified and our formal kick-off meeting is actually
going to be held tomorrow. We anticipate that it will take
about six months to complete the integration effort.
In summary, let me say that I'm pleased we were able to exceed the
street's consensus of about $.84 in the 3rd quarter in spite of some
uncooperative weather. I'm also pleased that during the quarter
we achieved resolution in Ohio of our restructuring case and
also announced the merger with GPU. Both of these are major
milestones and will help position us for continued success.
Looking towards the fourth quarter, the consensus earning
estimate seems to be about $.55, with year 2000 estimates
averaging about $2.63. The estimate for that year is a bit
conservative, and would expect that we should be able to meet or
beat the high-end of the first call 2000 earnings estimate which
I believe is $2.65 per share.
As always, we appreciate your time and continued interest in
FirstEnergy. We look forward to seeing many of you later this
month at the EEI financial conference in San Francisco. We will
be holding a luncheon presentation on Monday, October 30th, and
we hope to see many of our friends from the analyst community
there.
That concludes our formal remarks, and I'd like to ask Arlene to
now open the call to questions from the analysts that are
participating. Thank you.
THE OPERATOR: Thank you, sir. Ladies and gentlemen, we will
now begin the question and answer session. If you have a
question, you would need to press the 1, followed by the 4 on
your push-button phone. You will hear a three-tone prompt
acknowledging your request. If your question has been answered
and you would like to withdraw your pulling request, you may do
so by pressing the 1, followed by the 3 on your push-button
phone. If you're using a speaker phone, please pick up your
handset before entering the numbers. One moment please for the
first question.
Emily Lacusha,Credit Suisse First Boston, please go ahead with
your question.
BY MR. LEVY: Q. Hi, guys, it's Andy Levy. I know next
year is a kind of transition year, because you do have the
merger and you hope to close on that, but could you maybe just
comment on the outlook for next year, just on a stand alone
basis? I guess consensus is $2.76, First Call?
A. Yeah. Andy, again, we are still in a general way, and we're
still going through our annual budgeting process yet, so we have
not totally come onto that conclusion ourselves. I think that
earnings estimate should easily be doable, if not exceedable.
We're very much hoping that some of the changes we are putting
in place in our nonregulated units will increase their
contribution next year. Hopefully weather will be a little bit
more in our favor as well. So I think that should be doable or
exceedable. At this point in time, even though we're still early
in our process -- that's about the best guidance I can provide.
Q. Is there a way to quantify, year-to-date, how much earnings
-- I don't want to say were a loss, I don't know if that's the
right term, but clearly there were certain operations that
didn't seem to work exactly right, and then other operations
that worked very well above expectations. But just looking at
operations that haven't done well, you know, the retail
business, for example, top line they've done well, but bottom
line, they're not meeting expectations. And then, somewhere on
the energy services side, is there a way to quantify how much
under budget you came in year-to-date thus far, and, in a sense,
looking into next year, is that reversible?
A. To answer your second question first, Andy, yes it is
definitely reversible. Let me give you just some indications on
that. FE Services, which is our unregulated sales and marketing
operation, looking on an EBITDA basis, there seems to be more
interest, taxes, depreciation and amortization. Year-to-date
through September is running about $10 million behind our budget
expectations. There's a couple major factors for that. One is
reduced sales volume and increased power cost, which I believe
Tom mentioned on the call. And we've also decided to exit
certain marketplaces, and we've also decided to discontinue
certain customer programs that we had in place, because they
weren't generating the profitability that we had hoped for. And
those items contributed to that deviation in terms of the FE
Facilities Services Group, which are HVAC companies, their
variance is about -- on an EBITDA basis, about $9 million behind where
we expected them to be on the budget side. My expectation is
that that variance will probably persist through the remainder
of this year. Although the absolute results will improve,
because a large portion of the Facilities Services Group's income
is generated during the fourth quarter -- a disproportionate
amount. But yes, that is reversible next year. Certainly there
were some growing pains within the business and within some of
these markets in Pennsylvania and elsewhere as the markets
deregulated, but certainly we understand those better; I think
everybody does. And I think we will have a plan to push the
profitability of that group forward next year.
Q. To summarize, there's about $20 million in EBITDA that
probably was unusual, or didn't meet expectation, is probably a
better way to put it.
A. If you looked at MARBEL and FE Trading, that would be even a
little bit more than that, Andy.
Q. Okay. And that, you think, is reversible. And one last
question, and I'll let somebody else go. And I think it was
kind of asked by Paul on your earlier conference call you had.
But just, you know, kind of looking at the longer term picture in your
acquisition of GPU, I think one question you weren't able to
answer sufficiently in your last conference call is in a sense,
how do you deal with the fact that GPU was short power? You
guys obviously are building some peakers to help your service
area out, especially next year, as you get several hundred
megawatts coming on-line. But how, overall, do you deal with
the GPU situation, and have you given that any more thought from
the last conference call?
A. Sure have, Andy. I mean, our plan to meet their shoot position is
going to be really comprised of three elements, which are going
to be dynamic and change over time as requirements and market
liquidity change, but it's going to be met through our owned
assets, through long-term market contracts and also through
short-term market purchases. As Tom indicated, we do have some
peaking generation coming on-line. That amounts to about 1,155
megawatts through the summer of 2002. We also have some
additional generation that will be made available as a result of
either contract terminations or the DOE nuclear enrichment facility
in southern Ohio shutting down, as well as increased utilization
of our fossil fleet and customer load diversity. We think
adding that to the peaking availability, the 1,155 megawatts
that I mentioned, will give us an additional 2,500 megawatts on
top of the 12,000 megawatts that we have now. Now, that's still
going to leave us a little short, roughly about 2,000 megawatts
in 2001, and perhaps as much as 5,000 megawatts short in the
year 2002. We are working on this, but I can say, we are
talking with a number of power suppliers in the marketplace
right now about long-term contracts. I can say that these talks
are going well and we like what we're seeing out there. There's
certainly ample liquidity out there. So we will continue to
work as we go forward to put it in place, all the elements of
the program that will make sense and will allow us to meet that need
in a cost-efficient manner. So we will have continuing
developments on that as we move forward over time.
Q. This is interesting, so obviously a lot of megawatts are
trying to contract for it, and I don't know how much information
you want to give us on that, but just in general, I'd be
curious, what type of term can you get? Not obviously price,
because that, you're not going to share, but time wise, can you
get more than a one-year agreement, are people willing to give
you multi-year agreements on a set price?
A. Yes, Andy. In fact, we just recently signed a ten-year
supply contract with Constellation. It is a very interesting
contract. It has both put and call features associated with it.
But that is a ten-year contract that runs through the year of
2010. I would say definitely yes. We are also talking with a number
of other suppliers. Some are terms 3 to 5 years and some are terms
5 to 10 years. So yes, there is a longer term available.
Q. You're able to make money on these contracts based on your
rates and frozen where they are and, you know, forget about the
retail aspect of it, but just as far being able to supply those,
you can make money on that?
A. That's correct Andy. We have been pleased with the progress
we've made there.
Q. Great. Thank you. I've taken a lot of your time.
A. No problem.
Q. Thanks.
THE OPERATOR: Your next question comes from Jay Dobson of
Deutsche Bank Alex Brown. Please go ahead with your question.
BY MR. DOBSON:
Q. Rich, it's Jay Dobson. Just three quick questions, if I
could. The $2.65 guidance you're offering, or saying at least
from a consensus point of view, you're comfortable, you would be
at higher end or above that. Are you including the gain you
realized in the third quarter on the sale of the emission
credits?
A. That is correct.
Q. You are, okay. And could you give us a little insight what
drove the decision to book lower accelerated depreciation in the
third quarter?
A. Actually, it was higher than the amount we budgeted, Jay, so
that variance, you know, quarter to quarter, year to year, was
over the amount we had budgeted, although it's less than last
year. In total, we will be well over where we were in 1999.
Q. Okay. So on that math, I should assume that the fourth
quarter accelerated depreciation would be similar or in excess of
what you booked in the fourth quarter of '99?
A. That's correct, Jay.
Q. Okay. Great. Hey, thanks a lot. I appreciate it.
THE OPERATOR: Your next question comes from Bill Mastoris,
from BNY Capital Markets. Please go ahead with your question.
BY MR. MASTORIS:
Q. Could you provide a little bit more detail in terms of a
breakdown on your debt repurchases, maybe between discretionary
debt repurchases and mandatory. And if you have any plans for
discretionary debt repurchases going forward, any light that you
could shed there would be greatly appreciated.
A. Hi, Bill. It's Tom Navin. Bill, the mandatory redemptions
that were mentioned on that call were just that. They were all
mandatory maturities that we were able to take out with cash.
Those numbers did not include any optional redemptions, and we
do have a couple of -- a series of first mortgage bond issues
that are currently callable, however, the economics of carrying
out those early calls hasn't been there for us.
Q. Okay. So can I safely assume that you have no planned
discretionary debt repurchases for the balance of the year?
A. We just have -- just $23 million in remaining mandatory
reductions that we are planning on taking out with cash. We're
not looking at any optional reductions for the balance of the
year.
Q. Okay. Thank you.
THE OPERATOR: Your next question comes from Vadula Merti of
FAC Capital. Please go ahead with your question.
BY MR. MERTI:
Q. Good afternoon.
A. Hi.
Q. Let's see, on the terms of the merger with GPU, can you give
us a sense right now as given the timeline of your filings and
everything like that, what you're thinking right now for a
merger close date?
A. We're hoping, certainly during the second quarter of next year,
Vadula, is our target. We've stated sort of a public target of June
1st, and we're going to work very hard to beat that. Obviously,
some of the regulatory approvals are not entirely within our
control, but we're doing everything we can to get the filings
prepared as soon as possible.
Q. Okay. I'm wondering also with regards to the various
nonregulated operations given that they've been struggling
somewhat here, are there any operations that may be considered -
- may potentially monetize or discontinue going forward, should
their performance not improve. And can you, like I say, give a
timeline as to how long these businesses will be given to, you
know, start achieving your objectives?
A. Nothing is carved in stone on this, but at this point we
believe these units are still essential to fulfill our retail
strategy. We think it's the right set of assets to have.
However, obviously, we would like to see better performance from
those and we do have a plan in place to improve these. And I do
think next year will be a pivotal year for us. We expect to see
a lot of traction generated. So I would say we don't have a
specific time frame or trigger date, but certainly we're aware
of the need for this group to be the engine that drives our
earnings forward as we move into this new unregulated
environment.
Q. Can you give us some, you know, overall target objectives
for the year '01 as they relate specifically to unregulated
group?
A. I can't, only, because we're still working on those
internally and we've not finalized those. But it should be
significantly greater than it is this year.
Q. Okay. And one last thing. You kind of went fairly quickly
through, as far as repurchase. I got that you repurchased, I
think 1.8 million shares during the third quarter, and that you
are now roughly three-quarters into the repurchase programs that will
be 11 million shares down out of 15?
A. That's correct. 11.1 million.
Q. Okay. And at this point, when do you think you would
anticipate having the current program completed and given the
current stock price, would you consider an additional
authorization after the current one is completed?
A. Vadula, this is Tom. Given the 15 million authorization
level, we'll probably work through the remaining 3.9 million
shares during the first half of '01. And it may not -- if the
price stays, you know, with current levels, it may not take us
that long to get there for --
BY MR. MARSH:
A. As far as additional authorization, the board will have to
look at that. Certainly, there are going to be lots of uses for
the cash that we generate, particularly in the early year, or
two or three of the merger in order to help pay down the debt.
So the board will have to balance that interest with the stock
price. So I guess that's something that we will have to see on
a going forward business.
Q. Okay. Thank you.
THE OPERATOR: Your next question comes from Verge Trotter of
Manning & Napier. Please go ahead with your question.
BY MR. TROTTER:
Q. Yes. Congratulations on the quarter.
A. Verge, how are you?
Q. Good. Yourself?
A. Thank you.
Q. All right. I guess the first question concerns the diesel
generators, $21 million of this year. Do you expect to have
that next year with your peakers coming on-line?
A. I think that item was just slightly over $5 million, Verge.
Q. Okay.
A. We may not need those next year. We do have the additional
peaking generation going in place. That will help meet our 2001
summer supply situation. The theory behind the diesel
generators, which was a very good one, was that we sited those
in our distribution load centers throughout our service
territory. And that is really the most efficient way to deliver
power during peak periods. Unfortunately, the hot weather never
materialized, so those units were not used that much. Our
expectation is that we will probably not need those for next
year.
Q. Okay. Also, you transferred your transmission assets to the
wholly owned subsidiary American Transmissions Systems. That
seems like a big deal. Could you talk a little bit about the
impact that will have, or what the plans for that going forward
are?
A. Sure. I guess we really view, this as sort of a positioning step.
It is a big deal in that those assets are in that wholly owned
sub. Obviously, the ultimate step, though, will be to form the
Regional Transmission Organization, what we call the "Alliance,"
which would basically be for us to divest those assets to a
regional group comprised of other transmission owners. And we
continue to work with some of our partners in the alliance,
including America Electric Power and Consumers Power and some of
the others, to push that concept forward. So I view it, Verge,
as another step on the path down the road to what we think is
the most logical conclusion for the transmission industry, which
is an independent, for profit, regional transmission entity.
Q. Okay, Rich. Well, once again, congratulations.
THE OPERATOR: Your next question comes from Linda Byus of
Dresdner, Kleinwort & Benson. Please go ahead with your question.
BY MS. BYUS:
Q. Hi. I have a follow-up question on the gains on the
emission allowance sales. This last quarter, you had $.10 of
your earnings come from that and absent that one time event,
earnings were actually down. During the second quarter, it was
basically the same thing. There were $.04 from these sales, and
operating earnings were flat. My question is, going forward,
when you're looking at earnings for next year, are you including
an incremental 15 to 20 cents from these one-time items, or are
you going to try to make up real operating earnings in the
future?
A. No. I would not expect to see the level of the emission
allowance sales that we had this year continue on next year,
Linda. We have been working through our inventory, and
obviously, part of this is a judgment call based on the market
value of those allowances now, what we think it's going to be in
the future. Our belief is that the value of those allowances
will decline over time and that's due to the, you know, changes
in the emissions laws and so forth. So we have had a number of
those stockpiled. We feel that they're sort of at a market-high
price right now. So that's why we've been liquidating that. I
would not expect that to be a significant contributor to
earnings going forth beyond this year.
Q. So you would actually expect a real incremental 15 to 20
cent per share gain in operating earnings next year relative to
this year?
A. Correct.
Q. Okay. Thank you.
A. Remember also, Linda, this year we had three nuclear
outages, as opposed to two that I believe we have scheduled for
next year. So that also has an impact.
Q. Thank you.
THE OPERATOR: Your next question comes from Doug Preiser of
McDonald Investments. Please go ahead with your question.
BY MR. PREISER:
Q. I just had a real quick question. Rich, earlier in the
year, you indicated you were looking for about $.07 in earnings
from the unregulated companies, where do you think they're going
to perform now?
A. Obviously, we're not going to get to that level this year
unfortunately, Doug. I think probably by the end of the year, I
would expect them to be probably a negative -- I'm just going to
give you a rough negative, negative probably 2 to 4 to 5 cents,
something in that range.
Q. And you're not prepared to give a forecast for a '01 yet?
A. No. But it's going to be a positive number, and it's going
to be a much greater significant positive number.
Q. Thank you very much.
THE OPERATOR: Your next question comes from Margaret Jones,
Prudential Securities. Please go ahead with your question.
BY MS. JONES:
Q. Hello. Can you just elaborate a little more on plans to
meet the needs of GPU for power going forward, and whether you
would anticipate trying to arrange some kind of a change in
GPU's regulatory picture in Pennsylvania to allow some kind of
adjustment in rates for purchase power cost?
A. Yeah. Thank you, Peggy. What she is referring to is that in
Pennsylvania, like New Jersey, the companies there are unable to
recover the cost of the power that they buy on the open market due to
their customers. Yes, we are continuing to look at the regulatory
situation there and whether some changes might be made, that's
something that's still underway. But as I said, going forward,
even above and beyond that, we know it's going to be a mix of owned
assets and long-term contracts and short-term market purchases
that will allow us to meet their short situation on a longer
term ongoing basis. Obviously, that's going to be one of the
key areas of the integration effort, and we do have a team
that's working on that now. As you can imagine, this is a big
issue for us and it will take a little bit of time to work it
out. But we have had a number of discussions with a number of
power generators in the eastern part of the country. So our
work is progressing pretty rapidly and we look forward to
keeping you posted on that as we go forward.
Q. Thank you.
A. Thank you.
THE OPERATOR: Your next question comes from David Reynolds,
Morgan Stanley Dean Witter. Please go ahead with your question.
BY MR. REYNOLDS:
Q. Yes, good afternoon, gentlemen. Just a quick question
following up on these emission allowances. Rich, I heard you
say that you were really selling down some inventory, figuring
they were probably as well valued as they were going to get. Is
that all there is to this? Is that in any way related to the
better than expected or continually improving nuclear
performance? And maybe you could just shed some light on why
you guys think the value of the emission allowances are going
down rather than up?
A. Really, basically a market timing call, David. I mean, we
have had these allowances in our inventory for a while now. The
reason, as I understand it, that our fuel people believe that
the values of these are going to go down is because of the changing
environmental and emissions regulations. They believe that they
will make these somewhat irrelevant or redundant, I guess I
would say. So they believe they are sort of at a peak basis
right now. We don't believe that we need them going forward or
have any use for them. So rather than holding on to them and
risking that the price goes down, as our forecasts indicate, we
just decided that we're going to take the gains and get out of
it and things will go forward.
Q. Okay. Thanks. Great.
THE OPERATOR: If there are any additional questions, please
press the 1, followed by the 4 at this time. Gentlemen, I'm
showing no further questions at this time. Please continue with
your presentation or closing remarks.
MR. MARSH: We appreciate that Arlene. Thanks everybody.
We appreciate your time today and certainly look forward to
seeing many of you in San Francisco in several weeks. I appreciate
your interest and follow up questions. If you have any additional
follow-up questions, please feel free to either give myself or Tom
Navin or Kurt Turosky a call. Thanks very much and have a good day.
THE OPERATOR: Ladies and gentlemen, a posted replay of this
conference will be available from 4:00 Mountain Time on October
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Energy website at www.firstenergycorp.com. That does conclude
our conference for today. You may all disconnect and thank you
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