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Posted on Sat, Sep. 13, 2003 story:PUB_DESC
Stock sale by utility dimmed
SEC seeks more information from FirstEnergy; analysts say share price reduction costs $24 million

Beacon Journal business writer

A cloud came over FirstEnergy Corp.'s sale of 28 million shares of common stock Friday.

On the eve of the sale, the Securities and Exchange Commission requested more information about the Akron-based utility's earlier restatement of earnings for 2002, possibly pushing down the offering price.

Trading in FirstEnergy was delayed until nearly noon Friday. The company said it requested the delay while it finalized the price of its stock sale at $30 a share.

The company, under growing pressure to repair its low credit ratings, said it will use the $840 million in proceeds from the stock sale to pay off short-term debt.

The stock sale was underwritten by Citigroup Global Markets and Morgan Stanley & Co., who have the option of buying an additional 4.2 million shares, which could raise an additional $126 million for FirstEnergy.

Several analysts said the shares were originally planned to be sold for $30.75, and said the price was reduced after FirstEnergy filed corrections to its earnings restatement Thursday and disclosed the SEC request on Friday.

FirstEnergy disputed those reports, and officials from the underwriters did not return calls.

``The deal wasn't priced until today,'' spokeswoman Kristen Baird said on Friday. ``A deal doesn't happen until you have a signed agreement among all the underwriters, and we announced the deal when there was one and that was today.''

FirstEnergy, which is also under scrutiny for its role in last month's widespread power blackout and for problems at its Davis-Besse nuclear power plant, said it will comply with the SEC's request for information.

The company called the request informal and voluntary and said it didn't expect any adverse results.

An SEC spokesman declined to comment on Friday.

FirstEnergy would not say what the SEC is seeking, except to say it concerns accounting methods related to certain facilities and rates.

Some analysts said they had expected the shares to be priced at $30.75.

``I understand a few of the investors were nervous about the SEC inquiry, and the price was lowered to keep all the sales in place,'' said James Halloran, an energy analyst with National City Wealth Management in Cleveland, which owns 41,339 shares of FirstEnergy.

``The company got an SEC inquiry and that obviously dampened receptivity (among investors),'' said Paul Ridzon, an analyst with McDonald Investments in Cleveland.

Paul Fremont, an analyst with Jefferies & Co. in New York, said the group of underwriters ``considered pulling the deal or changing the price, and they settled on changing the price.'' He said it would be difficult to gauge the seriousness of the SEC inquiry until the matter is resolved.

Cost of cutback

If the price indeed was cut back to $30, that would have cost FirstEnergy about $24 million in lost stock revenue. The price of a stock offering is negotiated between the company and its underwriters.

Whether the price was changed or not, the company could have raised more money had its stock price not been hammered in recent months as a result of the restatement announcement and last month's power blackout.

Some of FirstEnergy's transmission lines and an energy plant failed before the blackout, and the company is under scrutiny for its possible role in the outage.

``It would have been nicer for the company if they could have sold these shares when their stock was near $40,'' said Paul Larson, an analyst at Morningstar in Chicago.

FirstEnergy shares have been in the low $30s and high $20s for the last month, down from $38.50 in early July.

When trading finally began Friday morning, the initial trades were at $30.32, below Thursday's closing price of $31.10. Shares fell as low as $29.98 in trading Friday before rising to $31.81, up 71 cents at the close.

The company said it will put the proceeds of Friday's stock sale toward paying down about $1 billion in short-term debt.

It had earlier planned to retire short-term debt by selling four power plants, but had to find another way to raise money after that deal fell through.

Looming issue

Reducing debt is a looming financial issue for FirstEnergy. Credit rating agencies Moody's and Standard & Poor's recently placed the company on watch for a possible downgrade of its approximately $15 billion in debt to below investment grade.

``FirstEnergy wants to maintain their credit rating, and they definitely accomplished that goal for the time being with the stock sale,'' said Fremont of Jefferies & Co. ``But they still need to tend to other things, such as getting Davis-Besse restarted, to completely remove credit agency concerns.''

Davis-Besse has been closed since February 2002 to deal with corrosion problems with the reactor vessel head.

The company clearly was embarrassed Friday by the additional mistakes, which threatened to overshadow its stock sale.

``This is not something we're real happy about, as you can imagine,'' said Baird of FirstEnergy. ``When we knew we were going to have to restate, we had a couple of weeks to do complete new restatements and complete re-audits. There was a tremendous amount of work done in a short period of time, and some things were missed.''

She characterized the mistakes as ``typographical mistakes'' and ``minor computational errors.'' She said the mistakes did not affect the restated results for 2002.

The restatement reduced earnings for 2002 by $76.5 million, or 26 cents per share, to $552.8 million, or $1.89 per share. The restatements stemmed from changes in how the company accounts for costs related to Ohio's move toward a competitive energy market.

John Russell can be reached at 330-996-3550 or
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