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Posted on Wed, Aug. 27, 2003 story:PUB_DESC
FirstEnergy finances still humming
Despite enormous blackout, troubled plant, other concerns, Akron utility is not in distress, senior vice president says

Beacon Journal business writer

The monthly checks from more than 4 million utility customers keep coming in at FirstEnergy Corp.

And despite some analysts' concerns about a host of problems, the Akron-based utility said it will have operating cash flow this year of about $800 million before paying dividends. Those concerns include the utility's role in the historic Aug. 14 blackout, management mistakes, a surprise earnings restatement and a troubled nuclear power plant that has burned a$450 million-plus hole in the corporate wallet the last 18 months.

While it initially has been fingered as the possible instigator in the massive blackout and has lowered its earnings outlook for the year, FirstEnergy is not in financial distress, Richard Marsh, senior vice president and chief financial officer, said Tuesday.

``Clearly, we are under the microscope,'' he said.

The company will have a likely $500 million to $750 million equity offering in the near future that it will use to bolster its credit rating, he said. ``All things being equal, we would like to do it sooner than later,'' he said.

Among those who question FirstEnergy's finances is Carol Levenson, a bond analyst atChicago-based Gimme Credit. FirstEnergy's second-quarter filing and earnings restatement with the Securities and Exchange Commission showed badly deteriorated liquidity, she said.

Other analysts also questioned FirstEnergy's finances. In addition, credit rating agencies Moody's and Standard & Poor's recently placed FirstEnergy on watch for a possible downgrade of its approximately $15 billion in debt to below investment grade.

But Marsh said it appears to him that some of the most critical analysts have not followed the company closely and did not have a clear idea of how the company operates. ``A lot of people drew a lot of inferences'' from the filings, he said.

After flirting with all-time highs in June and early July, FirstEnergy's stock subsequently took two major hits. The first came Aug. 5, when the company surprised investors by saying it will restate earnings going back to 2002, causing the stock price to drop 8.3 percent in a day.

The first quarter 2003 restatement lowered earnings by $22.5 million, or 8 cents per share, to $218.5 million, or 74 cents per share. The restatement reduced earnings for all of 2002 by $76.5 million, or 26 cents per share, to $552.8 million, or $1.89 per share.

The company restated earnings after reviewing the transition costs following its $4.5 billion acquisition in 2001 of the New Jersey-based utility GPU Inc.

The restatement will result in an increase in net income of $381 million from 2006 to 2017, the company said. FirstEnergy said it expects to earn $2.68 to $2.88 per share this year, down from its previous estimate of $3.35 to $3.55 a share.

The second shock hit when investigators of the Aug. 14 blackout said it appeared the massive outages that spread in the Midwest and Northeast United States and parts of Canada started in FirstEnergy's system in northern Ohio. Investors sold off Aug. 18, sending share prices down 9.3 percent to $27.75, in its largest percentage drop ever.

By Tuesday, FirstEnergy stock had regained about half of the post-blackout plunge. Shares closed up 65 cents at $29.19.

Meanwhile, Marsh said FirstEnergy keeps generating cash.

After paying out about $400 million in dividends this year, the company will be left with about $372 million in cash, about $100 million more than a year ago, he said. One-time items will boost that total to about $575 million, he said. Most of that will go toward paying down debt, he said.

``That's a cash-flow number most Fortune 500 companies would die for,'' Marsh said. Even so, that's less than he and FirstEnergy's other top executives had forecast earlier in the year, he said.

``We typically use all our cash to pay down long-term debt,'' Marsh said. The company typically does not carry a cash balance, he said.

The cash-flow numbers are not readily apparent in FirstEnergy's required filings with the Securities and Exchange Commission, company spokesman Ralph DiNicola said.

Problems at the Davis-Besse nuclear power plant have cost the company more than $450 million in the last 18 months and have been a larger-than-anticipated drag on cash and earnings, Marsh said. The company hopes to get Davis-Besse restarted this fall, pending approval from the Nuclear Regulatory Commission.

``That's cash that would have been used to pay down debt,'' Marsh said. ``Those costs have impacted our cash flow and how people perceive the company.''


Jim Mackinnon can be reached at 330-996-3544 or jmackinnon@thebeaconjournal.com
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