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Purchase of N.J. utility perks up FirstEnergy profits

07/25/02

John Funk
Plain Dealer reporter

The purchase of a New Jersey-based utility and accounting changes helped Akron-based FirstEnergy Corp. to post a second-quarter earnings increase despite the impact of the crippled Davis-Besse nuclear power plant.

FirstEnergy yesterday reported second-quarter income of $233.3 million, or 79 cents per diluted share, on total revenues of $2.95 billion. That's up from $146 million, or 67 cents per share, on revenues of $1.8 billion for the second quarter of 2001.

The Davis-Besse plant in northwest Ohio cost shareholders 9 cents per share in the second quarter, or $46 million in lost earnings.

The company credited the increase in profits to its Nov. 6 merger with the former GPU Inc., of Morristown, N.J., increased profit margins on electric sales and an accounting change that eliminated goodwill amortization expenses.

Looking at last year on a pro forma basis, that is, assuming GPU was part of the company then, FirstEnergy figures its profits in the second quarter of 2001 would have been $203.8 million, or 70 cents per share, on total revenues of $2.98 billion, according to the company's earnings report.

Of the $46 million that Davis-Besse cost the company in the second quarter, $34 million went to buy replacement power and $12 million to plant repairs in preparation to replace the reactor's rusted-out lid.

The company has purchased a 17-year-old, unused replacement lid from a Michigan utility that never completed construction of its nuclear plant. FirstEnergy estimates the cost to buy, restore and install the lid to be between $55 million and $75 million - all of which will be amortized over the remaining life of the plant.

The company estimates it will spend an additional $50 million to $70 million restoring and upgrading other parts of the plant - all of which will be charged to current operating expenses.

Richard Marsh, FirstEnergy's chief financial officer, said yesterday that the company is spending $20 million this month and in August for power and will spend $10 million to $15 million on power in September and every subsequent month the plant remains idle.

If Davis-Besse is not restarted this year, the company will spend between $120 million and $160 million to buy power. All of that will cost shareholders.

In a teleconference with investors yesterday, Marsh and other top financial officers said they have signed contracts for replacement power through January.

Marsh said the company still believes it can have the reactor rebuilt and ready to restart sometime in the fourth quarter, but he stressed he could not predict when the Nuclear Regulatory Commission would approve restarting the plant.

Earlier this month, an NRC committee met with FirstEnergy near its Davis-Besse plant in Oak Harbor. The NRC committee made it clear that it will not give approval until FirstEnergy changes the work ethic of its nuclear division's employees, from the top officers to the maintenance crews.

Paul Ridzon, an analyst with McDonald & Co., nevertheless said he is confident that FirstEnergy will satisfy the NRC's demands.

"The company seems to be responding well [to NRC demands]. I look for them to continue to show progress," he said. "It's a big task, but they are chipping away at it."

McDonald & Co. does banking work for FirstEnergy. Ridzon said he does not own any FirstEnergy stock.

James Halloran, an analyst with National City's Private Investment Advisors, said he agrees with FirstEnergy's strategy of treating the Davis-Besse repair as a one-time event.

"I see no reason not to treat it as they do - a nonrecurring situation. However long it takes to get it done, the ongoing effect [on the company] should be minimal," said Halloran, whose company does own a small amount of FirstEnergy stock. "In the long-term, the NRC will watch them more closely, but I think they have learned from it."

FirstEnergy's stock, traded on the New York Stock Exchange, closed yesterday at $29.16, up $4.11. The stock reached a high of more than $38 just before the company discovered the rust hole in the Davis-Besse reactor head in early March.

To reach this Plain Dealer reporter:

jfunk@plaind.com, 216-999-4138


2002 The Plain Dealer. Used with permission.
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