01—Abstract
Summary
Summary of the 10-K/A filed May 9, 2003. Cited figures are marked; the original filing is the authoritative source.
FirstEnergy's amended 2002 10-K/A (Amendment No. 1, dated May 9, 2003) restates the presentation of its 2002 income statement without changing reported net income of $629.3 milliona or diluted EPS of $2.14.
The changes reclassify the Avon and Emdersa results of operations, which were previously shown as a $57.1 millionb cumulative effect of accounting change, into operating lines, and add a $93.7 million 'Cumulative Adjustment for Retained Businesses Previously Held for Sale' below expenses. Pre-tax income before interest and taxes is now $2,157.9 million, versus $2,182.2 million as originally presented, and income before the cumulative effect is $629.3 million, versus $686.4 million as originally presented. Investors should read the reported 2002 earnings as unchanged, but the quality and composition of income moved.
The year was dominated by the extended Davis-Besse nuclear outage, which reduced 2002 EPS by $0.47c, and by roughly $292.5 million of pre-tax one-time charges that cut EPS by about $0.70. Revenues rose to $12.25 billion, almost entirely because of the former GPU companies, which were consolidated for a full year. Net income fell to $629.3 million from $646.4 million, and the regulated segment earned $997.1 million while the competitive segment lost $119.0 million.
Common equity fell to $7.12 billiond from $7.40 billion, mainly because of pension-related accumulated other comprehensive loss, and total assets declined to $33.6 billion from $37.4 billion after the Avon sale and the reclassification of divested assets. Balance-sheet deleveraging and the restart of Davis-Besse are the key items for investors. Total long-term debt fell to about $10.9 billion, and management plans to reduce debt and preferred stock through operating cash flow, but the timing has been pushed back by the outage costs.
Management reported that the Davis-Besse restart was targeted for the first half of summer 2003 and still needed NRC approval. Pending items include the JCP&L New Jersey rate case, with a decision expected in July 2003, the Sammis Clean Air Act litigation, and the Emdersa exit in April 2003, which will produce a second-quarter 2003 charge of about $63 million.
02—Key points
Key Highlights
- Reported 2002 net income was $629.3 million and diluted EPS was $2.14, both unchanged by the amendment; the revision only reclassifies Avon and Emdersa results, moving a $57.1 million charge from cumulative effect into operating income.
- A new $93.7 million after-tax 'Cumulative Adjustment for Retained Businesses Previously Held for Sale' line was recorded for Emdersa, reflecting $108.9 million of currency transaction losses partly offset by $15.2 million of operating income.
- The extended Davis-Besse nuclear outage cost about $234.5 million in 2002, including $0.47 per share of incremental outage costs, and restart was targeted for the first half of summer 2003 pending NRC approval.
- Revenues increased to $12.25 billion from $8.0 billion, driven by a full year of the former GPU companies; regulated services earned $997.1 million while competitive services lost $119.0 million.
- Total one-time pre-tax charges were $292.5 million, or $0.70 per share, including $100.7 million of investment impairments and $55.8 million of Pennsylvania deferred energy costs.
- Shareholders' equity fell to $7.12 billion from $7.40 billion, largely from a $449.6 million after-tax minimum pension liability and $91.4 million of currency translation losses, and total assets declined to $33.6 billion.
- Deleveraging is still a priority: the company expects to fund 2003 obligations from operations, and the Emdersa abandonment in April 2003 will produce a second-quarter charge of about $63 million, or $0.21 per share.
03—Questions
Frequently Asked Questions
Did the amendment change FirstEnergy's reported 2002 earnings?
No. Net income of $629.3 million and diluted EPS of $2.14 are unchanged. The amendment only reclassifies how the Avon and Emdersa results were presented in the income statement, moving a $57.1 million charge from the cumulative effect of an accounting change into operating results and adding a $93.7 million cumulative adjustment line.
What drove the decline in net income from 2001 to 2002?
Net income fell to $629.3 million from $646.4 million. Excluding the former GPU companies, net income dropped to $469.4 million from $615.5 million, mainly because of the extended Davis-Besse outage, about $0.46 per share of one-time charges net of 2001 items, and the cessation of goodwill amortization offset some of the decline.
What are the main risks to FirstEnergy's credit profile?
Rating agencies had outlooks that were negative for several FirstEnergy entities. Standard & Poor's tied its ratings to the timely restart of Davis-Besse without significant delay beyond April 2003, and to deleveraging, the JCP&L rate case, and the capture of merger savings. Significant Davis-Besse delays or slower debt reduction could increase pressure on the ratings.
What are the key pending regulatory and legal matters?
The JCP&L New Jersey rate case has a recommended decision due in June 2003 and an NJBPU decision expected in July 2003, and auditors identified potential disallowances of $17.3 million. The Sammis Plant Clean Air Act case against OE and Penn, which seeks best available control technology and penalties of up to $27,500 per day, began hearings in February 2003. The company believes the claims are without merit.
How much debt and preferred stock must FirstEnergy retire, and how will it fund that?
The company has about $1.07 billion of long-term debt and preferred stock maturing in 2003 and about $3.9 billion scheduled for 2004 through 2007. It plans to meet 2003 cash needs from operating cash flow, existing cash, and revolving credit, with available borrowing capacity of $177 million under its $1.5 billion revolving lines as of year-end 2002.
04—Continue