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