01—Abstract
Summary
Summary of the 10-K filed March 15, 2004. Cited figures are marked; the original filing is the authoritative source.
FirstEnergy Corp. (FE) filed its combined 2003 Form 10-K on March 15, 2004, covering the holding company and seven utility subsidiaries.
The year was dominated by the August 14, 2003 Northeast blackout, the extended Davis-Besse nuclear outage, and a downgrade of credit ratings by S&P (December 2003) and Moody's (February 2004). Reported 2003 net income fell to $423 milliona ($1.39 per diluted share) from $553 million in 2002, while revenues rose to $12.3 billion. The headline income figure is flattered by a $168 million NRG settlement gain and a $102 million cumulative-effect credit from adopting SFAS 143, while the JCP&L rate-case disallowance, a $117 million goodwill impairment, and higher replacement power and pension/OPEB costs weighed on results.
Management emphasized the divestiture of all remaining international assets by January 30, 2004, a $935 millionb common stock issuance in September 2003, and a debt reduction program that cut the common equity share of capitalization to 45% from 38%. Pending regulatory decisions carry significant uncertainty, most notably the Ohio Rate Stabilization Plan (decision expected spring 2004), New Jersey BGS and JCP&L rate matters, and Pennsylvania reliability and PLR proceedings. Litigation tied to the restatements, the blackout, and Davis-Besse, plus an SEC data request, adds further contingent risk that management says could be material.
For investors, the key question is whether the Davis-Besse restart (authorized by the NRC on March 8, 2004) and a favorable Ohio rate outcome can restore credit quality and earnings momentum. The filing also discloses a material weakness in capital/expense classification identified in Q4 2003, which led to restatements of JCP&L, Penelec, and Toledo Edison quarterly results.
02—Key points
Key Highlights
- Net income of $423 million ($1.39 diluted EPS) in 2003, down from $553 million ($1.88) in 2002, though boosted by a $168 million NRG claim settlement gain and a $102 million SFAS 143 cumulative-effect credit.
- Revenues rose to $12.3 billion from $12.0 billion, driven by wholesale and competitive sales (FES), while regulated distribution deliveries were flat and retail regulated sales fell 7.2%.
- JCP&L's NJBPU rate decision produced a $185 million pre-tax charge ($109 million after tax), including a $153 million disallowance of deferred energy costs; a $117 million goodwill impairment at FSG was also recorded.
- Credit ratings were cut: S&P lowered FirstEnergy senior unsecured debt to BB+ (December 2003) and Moody's to Baa3 (February 2004), raising collateral calls and borrowing costs.
- Common stock issuance of 32.2 million shares in September 2003 raised about $935 million, lifting common equity to 45% of capitalization from 38% a year earlier.
- Davis-Besse received NRC restart authorization on March 8, 2004 after an extended outage that cost $289 million in 2003 (replacement power $196 million).
- Management disclosed a material weakness in internal controls over capital versus expense classification, which led to restatements of quarterly results for JCP&L, Penelec, and Toledo Edison.
03—Questions
Frequently Asked Questions
Why did FirstEnergy's 2003 net income decline despite higher revenues?
Revenues rose to $12.3 billion, but higher purchased power and fuel costs (up $889 million in purchased power alone), the JCP&L disallowance, the FSG goodwill impairment, higher pension and OPEB expense, and extended Davis-Besse outage costs more than offset them. Net income was $423 million versus $553 million in 2002.
How significant is the Ohio Rate Stabilization Plan to FirstEnergy's outlook?
It is central. The Ohio Companies asked the PUCO to extend current generation prices through 2008 and extend transition cost amortization periods, and a decision was expected in spring 2004. S&P cited the Ohio Rate Plan as a key factor for any ratings upgrade, so a favorable ruling would be an important positive, while an adverse one would add to regulatory uncertainty.
What legal and regulatory risks could materially affect FirstEnergy?
Management says securities and derivative litigation tied to the 2003 restatements, blackout-related tort and PUCO complaints, the Davis-Besse grand jury subpoena and possible NRC enforcement, the W. H. Sammis Clean Air Act remedy phase (trial scheduled July 2004), and the SEC's informal data request could each have a material adverse effect. No liability for Sammis has been accrued.
What did FirstEnergy do to address its internal control weakness?
Management reported that the weakness, tied to untimely work-management table updates and inconsistent cost allocation after a new ERP implementation, was corrected in Q4 2003 through added field-employee training, timelier table maintenance, and reconfiguration of the work management system. Quarterly results for JCP&L, Penelec, and Toledo Edison were restated.
What is the outlook for FirstEnergy's capital spending and debt?
Capital expenditures are forecast at about $2.3 billion for 2004-2006 (excluding nuclear fuel), with $713 million in 2004. Scheduled debt and preferred maturities total $1.26 billion in 2004, and the company expects to fund cash needs without increasing net debt, using operating cash flow and capital markets as needed.
04—Continue