Why are FirstEnergy's 2001 results hard to compare with prior years?

The GPU merger closed November 7, 2001 and was accounted for as a purchase, so FirstEnergy's 2001 income statement includes about seven weeks of the former GPU companies, while 2000 and earlier include none. The company reported that excluding those seven weeks (and related acquisition-debt interest), net income would have been about $613.7 million, versus $599.0 million in 2000. Analysts should also note that goodwill is no longer amortized under SFAS 142, which shifts earnings comparability in 2002.

How significant are the pending international and generation divestitures to investors?

They are significant for deleveraging. The filing shows $1.7 billion of Avon debt that would come off the consolidated balance sheet on closing, plus roughly $2.1 billion of Midlands-related liabilities in total. The Aquila transaction must close by April 26, 2002 or either party may terminate. The NRG sale of four plants (net book value $539 million) is expected to close mid-2002, with proceeds used to redeem high-cost debt and preferred stock. The Argentina operations are being actively marketed, but the filing notes impairment has not been recorded and economic conditions there are a risk.

What are the main regulatory risks in Pennsylvania and New Jersey?

In Pennsylvania, the Commonwealth Court reversed the PPUC's approval of PLR rate relief and deferral accounting for Met-Ed and Penelec, which could affect their deferred energy costs and stranded cost recovery; the company is seeking Pennsylvania Supreme Court review and says it cannot predict the outcome. In New Jersey, JCP&L has a $300 million regulatory asset write-off from merger settlement, a potential roughly $25 million charge if IRS treatment of tax benefits goes against it, and rates after July 31, 2003 are to be set in a 2002 rate case. JCP&L's BGS obligation for August 2002 to July 2003 was removed through a February 2002 auction, reducing near-term supply risk.

What nuclear and environmental liabilities could affect the company?

The Davis-Besse plant's refueling outage began February 16, 2002 and was extended after corrosion was found on the reactor vessel head; FENOC expects 60 to 90 additional days, $5 to $10 million of added O&M cost, and $10 to $15 million per month of higher energy costs. On the environmental side, the EPA and DOJ allege Clean Air Act violations at the W.H. Sammis plant dating to 1984 and seek best available control technology and penalties up to $27,500 per day; the company believes the claims are without merit but Sammis continues operating during litigation. Management estimates about $225 million of environmental capital spending in the 2002-2006 forecast and about $60 million of accrued environmental liabilities.

How strong is the balance sheet and what are the debt maturities?

Long-term debt rose to $12.9 billion, and common equity fell to 35% of capitalization (including debt tied to pending sales) from 42% at year-end 2000, reflecting $8.2 billion of added debt and preferred stock and $2.6 billion of new common stock issued to GPU shareholders. Consolidated debt and preferred maturities total about $1.15 billion in 2002 and $4.2 billion over 2003-2006 (excluding pending-divestiture debt). Management expects 2002 cash needs to be met without increasing net debt and preferred stock. Short-term borrowings were $614 million at a 2.8% average rate, and FirstEnergy had $865 million of available revolving credit. S&P's outlook is stable.

FE 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 1, 2002. Cited figures are marked; the original filing is the authoritative source.

FirstEnergy Corp. (FE) filed its combined 2001 Form 10-K on April 1, 2002 (signed March 28, 2002), covering itself and seven utility subsidiaries.

The defining event of 2001 was the November 7, 2001 merger with GPU, Inc., which roughly doubled the size of the enterprise: total assets rose to $37.4 billion^a from $17.9 billion, long-term debt to $12.9 billion from $5.7 billion, and FirstEnergy now describes itself as the fourth largest investor-owned electric system in the U.S. by customers served. Because the GPU companies were consolidated only for seven weeks, reported 2001 net income of $646.4 million (diluted EPS $2.81) is not comparable to prior years; excluding the former GPU companies, net income was about $613.7 million. The balance sheet carries significant pending-divestiture exposure.

Assets pending sale of $3.4 billion^b and liabilities pending sale of $3.0 billion relate mainly to Midlands Electricity (UK) and Argentina operations. The Avon/Midlands sale to Aquila for a 79.9% interest at roughly $1.9 billion including $1.7 billion of debt was pending, with a deadline of April 26, 2002 for completion. Separately, FirstEnergy agreed to sell four Ohio coal plants (2,535 MW) to NRG Energy for $1.5 billion, with a 10.5 billion kWh annual power purchase agreement back, expected to close mid-2002.

Goodwill of $5.6 billion^c (about 15% of assets) is a notable balance-sheet item to monitor for impairment. Regulatory and litigation risks are material. In Pennsylvania, the Commonwealth Court on February 21, 2002 reversed the PPUC's provider-of-last-resort rate relief and deferral accounting for Met-Ed and Penelec, which FirstEnergy is appealing to the state Supreme Court.

Moody's changed its outlook on FirstEnergy, Met-Ed and Penelec to negative. Other risks include the Davis-Besse reactor vessel head corrosion finding and an extended outage (60 to 90 days), the EPA's Clean Air Act suit over the Sammis plant seeking installation of best available control technology and penalties of up to $27,500^d per day, and a Colombian tax matter tied to TEBSA with a statutory penalty claim of about $200 million.

02—Key points

Key Highlights

Merger with GPU, Inc. closed November 7, 2001 and was accounted for under purchase accounting; 2001 results include only seven weeks of former GPU operations, so year-over-year comparisons are distorted.
Reported 2001 net income of $646.4 million (diluted EPS $2.81) versus $599.0 million (EPS $2.69) in 2000; net income before the $8.5 million SFAS 133 cumulative-effect charge was $654.9 million.
Total assets nearly doubled to $37.4 billion, including $3.4 billion of assets pending sale; goodwill reached $5.6 billion and regulatory assets $8.9 billion.
Planned divestitures: Midlands (Avon) sale to Aquila for a 79.9% stake (about $1.9 billion including $1.7 billion of debt), and the sale of four Ohio coal plants to NRG for $1.5 billion, both expected to reduce debt and preferred stock.
Pennsylvania regulatory setback: Commonwealth Court reversed PLR rate relief and deferral accounting for Met-Ed and Penelec; FirstEnergy petitioned the Pennsylvania Supreme Court and Moody's moved its outlook to negative.
Operational and legal risks: Davis-Besse reactor vessel head corrosion extends the outage by 60 to 90 days, and the EPA/DOJ Clean Air Act action over the Sammis plant seeks best available control technology and penalties.

03—Questions

Frequently Asked Questions

Why are FirstEnergy's 2001 results hard to compare with prior years?
The GPU merger closed November 7, 2001 and was accounted for as a purchase, so FirstEnergy's 2001 income statement includes about seven weeks of the former GPU companies, while 2000 and earlier include none. The company reported that excluding those seven weeks (and related acquisition-debt interest), net income would have been about $613.7 million, versus $599.0 million in 2000. Analysts should also note that goodwill is no longer amortized under SFAS 142, which shifts earnings comparability in 2002.
How significant are the pending international and generation divestitures to investors?
They are significant for deleveraging. The filing shows $1.7 billion of Avon debt that would come off the consolidated balance sheet on closing, plus roughly $2.1 billion of Midlands-related liabilities in total. The Aquila transaction must close by April 26, 2002 or either party may terminate. The NRG sale of four plants (net book value $539 million) is expected to close mid-2002, with proceeds used to redeem high-cost debt and preferred stock. The Argentina operations are being actively marketed, but the filing notes impairment has not been recorded and economic conditions there are a risk.
What are the main regulatory risks in Pennsylvania and New Jersey?
In Pennsylvania, the Commonwealth Court reversed the PPUC's approval of PLR rate relief and deferral accounting for Met-Ed and Penelec, which could affect their deferred energy costs and stranded cost recovery; the company is seeking Pennsylvania Supreme Court review and says it cannot predict the outcome. In New Jersey, JCP&L has a $300 million regulatory asset write-off from merger settlement, a potential roughly $25 million charge if IRS treatment of tax benefits goes against it, and rates after July 31, 2003 are to be set in a 2002 rate case. JCP&L's BGS obligation for August 2002 to July 2003 was removed through a February 2002 auction, reducing near-term supply risk.
What nuclear and environmental liabilities could affect the company?
The Davis-Besse plant's refueling outage began February 16, 2002 and was extended after corrosion was found on the reactor vessel head; FENOC expects 60 to 90 additional days, $5 to $10 million of added O&M cost, and $10 to $15 million per month of higher energy costs. On the environmental side, the EPA and DOJ allege Clean Air Act violations at the W.H. Sammis plant dating to 1984 and seek best available control technology and penalties up to $27,500 per day; the company believes the claims are without merit but Sammis continues operating during litigation. Management estimates about $225 million of environmental capital spending in the 2002-2006 forecast and about $60 million of accrued environmental liabilities.
How strong is the balance sheet and what are the debt maturities?
Long-term debt rose to $12.9 billion, and common equity fell to 35% of capitalization (including debt tied to pending sales) from 42% at year-end 2000, reflecting $8.2 billion of added debt and preferred stock and $2.6 billion of new common stock issued to GPU shareholders. Consolidated debt and preferred maturities total about $1.15 billion in 2002 and $4.2 billion over 2003-2006 (excluding pending-divestiture debt). Management expects 2002 cash needs to be met without increasing net debt and preferred stock. Short-term borrowings were $614 million at a 2.8% average rate, and FirstEnergy had $865 million of available revolving credit. S&P's outlook is stable.

04—Continue

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