10-QPeriod: Q2 FY2003

FIRSTENERGY CORP Quarterly Report for Q2 Ended Jun 30, 2003

Filed August 19, 2003For Securities:FE

Summary

FirstEnergy Corp. and its subsidiaries reported a net loss of $57.9 million for the second quarter of 2003, a significant shift from the $207.9 million net income reported in the same quarter of the prior year. This downturn was primarily driven by a $67.4 million after-tax charge related to the abandonment of operations in Argentina and unfavorable weather conditions impacting retail electricity sales. Despite the quarterly loss, the first six months of 2003 showed a net income of $160.6 million, albeit lower than the $326.2 million recorded in the first half of 2002. This performance was also affected by the Argentina divestiture, along with an accounting credit related to asset retirement obligations, and higher operational expenses including those related to the extended outage at the Davis-Besse Nuclear Power Station and increased employee benefit costs. The company's ongoing strategic focus includes optimizing its generation portfolio, managing commodity risks, reducing costs, and enhancing its credit profile amidst a changing energy market.

Key Highlights

  • 1Net loss of $57.9 million in Q2 2003, compared to a net income of $207.9 million in Q2 2002.
  • 2First six months of 2003 net income of $160.6 million, down from $326.2 million in the same period of 2002.
  • 3Significant after-tax charge of $67.4 million in Q2 2003 related to the abandonment of Argentina operations (Emdersa).
  • 4Mild weather in Q2 2003 negatively impacted retail electricity sales.
  • 5Increased operating expenses due to the extended outage at the Davis-Besse Nuclear Power Station and higher employee benefit costs.
  • 6Adoption of SFAS 143 impacted results with an after-tax credit of $102.1 million in the first six months of 2003 for asset retirement obligations.
  • 7S&P and Moody's have both reviewed FirstEnergy's debt ratings, with Moody's placing them under review for possible downgrade due to weaker operating performance and debt reduction concerns.

Frequently Asked Questions

The decrease in net income was primarily due to a $67.4 million after-tax charge related to the abandonment of operations in Argentina (Emdersa), unfavorable weather conditions reducing retail electricity sales, and higher operating expenses. These included costs associated with the extended Davis-Besse Nuclear Power Station outage and increased employee benefit expenses.

The adoption of SFAS 143, 'Accounting for Asset Retirement Obligations,' in January 2003 resulted in an after-tax credit of $102.1 million recognized in the first six months of 2003. This credit was primarily due to the recognition of asset retirement costs and liabilities, with offsetting effects from depreciation and regulatory adjustments.

The Davis-Besse Nuclear Power Station experienced an extended outage. Incremental costs associated with this outage for the second quarter and first six months of 2003 were significant, impacting earnings per share. The company anticipates the unit will be ready for restart in the fall of 2003, but the Nuclear Regulatory Commission must authorize its return to service.

Following the Q2 2003 results, Standard & Poor's affirmed FirstEnergy's 'BBB' corporate credit rating but noted concerns about debt reduction strategy and highlighted key monitoring points including the Davis-Besse restart and liquidity. Moody's placed FirstEnergy's debt ratings under review for possible downgrade, citing weaker operating performance, less debt reduction progress, and the impact of the Davis-Besse outage, though they do not expect the senior unsecured debt rating to fall below investment grade.