Why did net income decline in 2002 despite the larger revenue base?

Revenues rose by about $4.2 billion, but most of that came from the former GPU companies, which were consolidated for a full year. Expenses rose faster, driven by $249M of one-time charges, roughly $0.47 per share of Davis-Besse outage costs, higher pension and OPEB expense, and a $57.1M after-tax accounting charge tied to the international divestitures. Excluding the GPU companies, net income fell about 24%.

When is the Davis-Besse plant expected to return to service, and why does it matter?

Management targets restart in spring 2003 (the company's current schedule projects April 2003), but the NRC must complete its formal inspection process and authorize restart. Delays would extend replacement power costs and could trigger an impairment evaluation of the plant. Restart is also a stated condition for S&P to keep current ratings, and debt reduction plans depend on it.

How much debt and preferred stock does FirstEnergy plan to retire, and how is it funded?

The 2003–2007 maturity and redemption schedule totals about $4.96 billion, of which $1.08 billion falls due in 2003. Management says 2003 cash needs will be met without increasing net debt or preferred stock, using operating cash flow, cash on hand, and revolving credit. Holding-company dividends from subsidiaries were $447 million in 2002, against $440 million of common dividends paid.

What are the main regulatory risks for investors?

The JCP&L New Jersey rate case could result in a 2003 decision on recovery of about $549 million of deferred energy costs, with auditors identifying $17.3M of potential disallowances. In Pennsylvania, the Supreme Court's January 2003 refusal to review the Met-Ed/Penelec PLR decision was largely offset by prior reserves. FERC's Standard Market Design and the MISO/PJM market integration remain unsettled.

Are there material environmental or litigation exposures?

Yes. The DOJ and EPA allege Clean Air Act violations at the W.H. Sammis plant (hearings began February 2003), seeking best-available-control-technology retrofits and penalties up to $27,500 per day. FirstEnergy considers the claims without merit and the plant continues to operate. Future mercury and NOx rules could also require significant capital, though the company's 2003–2007 capital plan includes only about $159M of identified environmental spending.

FE 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 26, 2003. Cited figures are marked; the original filing is the authoritative source.

FirstEnergy Corp. (FE) reported 2002 consolidated net income of $629.3 million^a, or $2.14 diluted EPS, down from $646.4 million in 2001, after a set of one-time charges and accounting changes.

Excluding the former GPU companies, net income fell to $469.4 million^b, driven largely by incremental costs of the extended Davis-Besse nuclear outage ($0.47 per share) and roughly $249 million of one-time pre-tax charges ($0.51 per share). Revenues rose to $12.15 billion from $8.0 billion, reflecting the full-year consolidation of the former GPU utilities acquired in November 2001, but the company also absorbed a $57.1 million after-tax cumulative-effect charge related to its international divestitures. Balance-sheet deleveraging remains the central investor question.

Total assets fell to $33.6 billion^c from $37.4 billion, common equity to $7.1 billion, and long-term debt to $10.9 billion. Management expects the Davis-Besse restart in spring 2003 (the NRC must approve), an outcome credit rating agencies have explicitly tied to maintaining current ratings. Debt reduction has been delayed by the outage and by higher pension, OPEB, and Emdersa-related charges, and S&P and Moody's have carried negative outlooks since 2002.

The filing also highlights several open regulatory and litigation items: the JCP&L New Jersey rate case (decision expected July 2003, with $17.3 million^d of potential disallowances proposed by auditors), the Met-Ed and Penelec PLR deferred-cost resolution now largely reserved, the stalled sale of four coal plants to NRG (now retained and subject to arbitration), and the DOJ/EPA Clean Air Act suit over the Sammis plant. Investors should weigh the restart timeline and 2003 guidance against these exposures.

02—Key points

Key Highlights

2002 net income of $629.3M ($2.14 diluted EPS) versus $646.4M in 2001; pre-merger-company net income fell to $469.4M from $615.5M.
Davis-Besse extended outage cost $0.47 per share in 2002; restart targeted for spring 2003 pending NRC approval, and 2003 replacement power costs estimated at $12–18M per month.
One-time pre-tax charges of $249.0M ($0.51 per share) in 2002, including $100.7M of investment impairments and $55.8M of Pennsylvania deferred energy costs.
Cumulative-effect accounting charge of $57.1M after tax, mainly the $88.8M Emdersa (Argentina) charge partly offset by a $31.7M Avon gain.
Total assets declined to $33.6B from $37.4B; long-term debt fell to $10.9B and common equity to $7.1B, with common equity at 38% of capitalization.
Credit outlooks at S&P and Moody's remain negative; S&P has tied rating stability to a Davis-Besse restart without significant delay beyond April 2003.
Pending items include JCP&L's NJ rate case (ALJ decision June 2003, NJBPU decision July 2003), the NRG arbitration over four retained plants, and the Sammis Clean Air Act litigation with penalties of up to $27,500 per day.

03—Questions

Frequently Asked Questions

Why did net income decline in 2002 despite the larger revenue base?
Revenues rose by about $4.2 billion, but most of that came from the former GPU companies, which were consolidated for a full year. Expenses rose faster, driven by $249M of one-time charges, roughly $0.47 per share of Davis-Besse outage costs, higher pension and OPEB expense, and a $57.1M after-tax accounting charge tied to the international divestitures. Excluding the GPU companies, net income fell about 24%.
When is the Davis-Besse plant expected to return to service, and why does it matter?
Management targets restart in spring 2003 (the company's current schedule projects April 2003), but the NRC must complete its formal inspection process and authorize restart. Delays would extend replacement power costs and could trigger an impairment evaluation of the plant. Restart is also a stated condition for S&P to keep current ratings, and debt reduction plans depend on it.
How much debt and preferred stock does FirstEnergy plan to retire, and how is it funded?
The 2003–2007 maturity and redemption schedule totals about $4.96 billion, of which $1.08 billion falls due in 2003. Management says 2003 cash needs will be met without increasing net debt or preferred stock, using operating cash flow, cash on hand, and revolving credit. Holding-company dividends from subsidiaries were $447 million in 2002, against $440 million of common dividends paid.
What are the main regulatory risks for investors?
The JCP&L New Jersey rate case could result in a 2003 decision on recovery of about $549 million of deferred energy costs, with auditors identifying $17.3M of potential disallowances. In Pennsylvania, the Supreme Court's January 2003 refusal to review the Met-Ed/Penelec PLR decision was largely offset by prior reserves. FERC's Standard Market Design and the MISO/PJM market integration remain unsettled.
Are there material environmental or litigation exposures?
Yes. The DOJ and EPA allege Clean Air Act violations at the W.H. Sammis plant (hearings began February 2003), seeking best-available-control-technology retrofits and penalties up to $27,500 per day. FirstEnergy considers the claims without merit and the plant continues to operate. Future mercury and NOx rules could also require significant capital, though the company's 2003–2007 capital plan includes only about $159M of identified environmental spending.

04—Continue

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