Why did FirstEnergy's earnings increase in 2000?

Net income grew to $599.0 million from $568.3 million, mainly due to lower fuel costs (fuel expense fell $103.6 million despite 7% higher output), a larger share of low-cost nuclear generation, reduced financing costs from debt redemptions and refinancings, and $38.5 million of gains on emission-allowance sales. Unregulated businesses contributed significant revenue growth but also higher operating expenses.

What is the status of the GPU merger and what are its terms?

FirstEnergy agreed on August 8, 2000 to acquire GPU, Inc. for about $36.50 per GPU share, payable in cash or FirstEnergy stock (50% cash / 50% stock overall), with exchange ratios between 1.2318 and 1.5055 FirstEnergy shares depending on the FE price. Both shareholder groups have approved, and FERC, NRC and FCC approvals have been received; SEC and other remaining approvals are expected by the end of Q2 2001. The transaction is accounted for under the purchase method and will add about $2.2 billion of acquisition debt.

How does the Ohio electric restructuring affect FirstEnergy's financial position?

Under the PUCO-approved transition plan, generation assets were impaired, with $1.6 billion reclassified as regulatory assets recoverable through transition charges, and SFAS 71 was discontinued for the generation business. Transition costs are recoverable through roughly 2005–2008 depending on the company, but FirstEnergy assumes the risk of not recovering up to $500 million if customer switching targets (20% average over 12 months by 2005) are not met. Customers began choosing alternative suppliers on January 1, 2001, and about 108,000 Ohio customers had requested other suppliers by February 2001.

What are the main environmental and regulatory risks?

The most significant near-term item is the EPA/DOJ Clean Air Act action over the W.H. Sammis Plant, seeking installation of best available control technology and civil penalties up to $27,500 per day; management considers the claims without merit but cannot predict the outcome. Longer term, the EPA's NOx Transport Rule (about 85% NOx reductions from 2007 projected levels), ultra-fine particulate and ozone standard revisions, and a planned mercury-focused hazardous air pollutant rule (proposal by 2003, final by 2004) could require substantial, currently undeterminable capital spending. Nuclear accident exposure is covered by Price-Anderson limits of $9.5 billion per incident.

What capital needs and debt maturities does the company face?

FirstEnergy plans capital expenditures of about $3.0 billion (excluding nuclear fuel) for 2001–2005, including $683 million in 2001, and about $2.6 billion of debt and preferred stock redemptions over 2001–2005. Nuclear fuel investment of about $380 million is planned for the period, and operating lease commitments net of trust receipts total about $821 million. Before the GPU acquisition, management expected to meet 2001 cash requirements without increasing net debt and preferred stock, but the merger is expected to require roughly $2.2 billion of new acquisition-related debt.

FE 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 28, 2001. Cited figures are marked; the original filing is the authoritative source.

FirstEnergy Corp. (FE) reported 2000 net income of $599.0 million^a ($2.69 per share), up from $568.3 million in 1999, on revenues of $7.03 billion (up 11%).

Earnings were driven mainly by lower fuel costs, higher generation output, reduced financing costs and gains on emission-allowance sales, while unregulated businesses (FE Services, FE Facilities, gas operations) accounted for much of the revenue growth. Total assets were $17.9 billion^b, and common equity rose to about 42% of capitalization, supported by credit-rating upgrades from Moody's and Fitch after the PUCO approved the Ohio transition plan in July 2000. The dominant investor issue is the pending merger with GPU, Inc., announced August 2000: FirstEnergy would pay about $4.5 billion in cash and stock for GPU's common equity, financed partly by roughly $2.2 billion of new acquisition debt, with about $7.4 billion of GPU subsidiary debt and preferred stock remaining outstanding.

Shareholder approvals are in hand, and the companies target closing by the end of Q2 2001 pending remaining regulatory approvals. The Ohio restructuring also brings regulatory and financial risk: generation assets were impaired and $1.6 billion^c was reclassified as regulatory assets, SFAS 71 was discontinued for generation, and FE assumes up to $500 million of transition-revenue risk if customer switching targets are missed by 2005. Other watch items include an EPA Clean Air Act enforcement action over the W.H.

Sammis plant (civil penalties up to $27,500^d per day, injunctive relief sought), the expected cost of future NOx, mercury and ultra-fine particulate rules, and nuclear decommissioning obligations of roughly $4.5 billion in future dollars. The filing is a combined 10-K for FE and four subsidiaries; FE's stock is listed on the NYSE.

02—Key points

Key Highlights

Net income rose 5.4% to $599.0 million ($2.69 EPS) in 2000 from $568.3 million ($2.50 EPS) in 1999; dividends held at $1.50 per share.
Revenues increased 11.2% to $7.03 billion, with unregulated businesses adding $709.3 million in net revenue growth, led by retail electric and gas sales.
Pending GPU, Inc. merger (~$4.5 billion cash and stock, ~$2.2 billion new debt) targeted to close by end of Q2 2001; shareholder approvals obtained.
Ohio transition plan approved July 2000: $1.6 billion of impaired generating assets moved to regulatory assets, SFAS 71 discontinued for generation, and up to $500 million of transition-revenue risk if switching targets are missed.
Credit ratings upgraded by Moody's and Fitch in H2 2000; common equity rose to nearly 42% of capitalization from 38% in 1998.
Total assets of $17.9 billion, with $3.7 billion of regulatory assets and $2.1 billion of goodwill as major balance-sheet items; 5.0 million stock options outstanding at year-end 2000.
Material contingent exposures: Sammis Plant Clean Air Act litigation (penalties up to $27,500/day), NOx Transport Rule compliance, mercury regulation, and nuclear decommissioning costs of ~$4.5 billion in future dollars.

03—Questions

Frequently Asked Questions

Why did FirstEnergy's earnings increase in 2000?
Net income grew to $599.0 million from $568.3 million, mainly due to lower fuel costs (fuel expense fell $103.6 million despite 7% higher output), a larger share of low-cost nuclear generation, reduced financing costs from debt redemptions and refinancings, and $38.5 million of gains on emission-allowance sales. Unregulated businesses contributed significant revenue growth but also higher operating expenses.
What is the status of the GPU merger and what are its terms?
FirstEnergy agreed on August 8, 2000 to acquire GPU, Inc. for about $36.50 per GPU share, payable in cash or FirstEnergy stock (50% cash / 50% stock overall), with exchange ratios between 1.2318 and 1.5055 FirstEnergy shares depending on the FE price. Both shareholder groups have approved, and FERC, NRC and FCC approvals have been received; SEC and other remaining approvals are expected by the end of Q2 2001. The transaction is accounted for under the purchase method and will add about $2.2 billion of acquisition debt.
How does the Ohio electric restructuring affect FirstEnergy's financial position?
Under the PUCO-approved transition plan, generation assets were impaired, with $1.6 billion reclassified as regulatory assets recoverable through transition charges, and SFAS 71 was discontinued for the generation business. Transition costs are recoverable through roughly 2005–2008 depending on the company, but FirstEnergy assumes the risk of not recovering up to $500 million if customer switching targets (20% average over 12 months by 2005) are not met. Customers began choosing alternative suppliers on January 1, 2001, and about 108,000 Ohio customers had requested other suppliers by February 2001.
What are the main environmental and regulatory risks?
The most significant near-term item is the EPA/DOJ Clean Air Act action over the W.H. Sammis Plant, seeking installation of best available control technology and civil penalties up to $27,500 per day; management considers the claims without merit but cannot predict the outcome. Longer term, the EPA's NOx Transport Rule (about 85% NOx reductions from 2007 projected levels), ultra-fine particulate and ozone standard revisions, and a planned mercury-focused hazardous air pollutant rule (proposal by 2003, final by 2004) could require substantial, currently undeterminable capital spending. Nuclear accident exposure is covered by Price-Anderson limits of $9.5 billion per incident.
What capital needs and debt maturities does the company face?
FirstEnergy plans capital expenditures of about $3.0 billion (excluding nuclear fuel) for 2001–2005, including $683 million in 2001, and about $2.6 billion of debt and preferred stock redemptions over 2001–2005. Nuclear fuel investment of about $380 million is planned for the period, and operating lease commitments net of trust receipts total about $821 million. Before the GPU acquisition, management expected to meet 2001 cash requirements without increasing net debt and preferred stock, but the merger is expected to require roughly $2.2 billion of new acquisition-related debt.

04—Continue

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