08/06/03

FirstEnergy Corp. said yesterday that it lost $57.9 million, or 20 cents per share, during the second quarter because of a number of unusual expenses, including a New Jersey rate case that the company lost and repairs to the long-idled Davis-Besse nuclear power plant.

The company also said it would restate and lower its earnings for the last five quarters and reduce projected earnings through 2005 because its independent auditor has recommended some complex accounting changes.

Those revisions involve lowered value of power plants that the company claimed as Ohio began to deregulate electric markets in 2001.

The loss was a surprise to the stock market, which expected a profit, and FirstEnergy stock fell by more than $3 before it recovered slightly and ended the day at $31.33, down $2.92.

"They should have disclosed some of these matters and some of these figures earlier," Edward Paik, a manager with Columbia Management Group with assets of $160 billion, including FirstEnergy stock, told Bloomberg News. "Their explanation of where the company is going wasn't very clear, and investors just headed for the hills."

The company said it expected to restate its second-quarter 2002 earnings at $216 million, a reduction of 73 cents per share. Revenue for the second quarter of 2002 and 2003 was unchanged at $2.9 billion.

Combined earnings for the first six months of this year were $160.5 million, or 55 cents per share, on revenue of $6.1 billion, compared with restated first-half 2002 earnings of $322 million, or $1.09 per share, on revenue of $5.8 billion.

Total restated 2002 earnings per share will be reduced to $1.91 per share, a 23-cent decline, and earnings this year will be shaved by an estimated 17 cents per share compared with the company's original guidance, said Richard Marsh, chief financial officer.

Chief Executive Officer H. Peter Burg would not rule out issuing more stock later in the year. The company may need the money to help pay down debt and keep an investment-grade rating on its bonds.

Burg noted during a telephone conference with analysts that the company will use cash to pay down more than $900 million in debt this year.

Bond rating agencies have closely watched the company since it bought another utility holding company, GPU Inc. of New Jersey, in 2001 for $11.9 billion.

In restating its earnings, the company said the values of the sale-lease-back deals on some of the power plants built by subsidiaries Ohio Edison Co., Cleveland Electric Illuminating Co. and Toledo Edison Co. may have been overstated.

Lowering the sale-lease-back value also lowers the accounting value of deregulation fees, called "transition charges" on monthly electric bills. These have allowed FirstEnergy to accelerate the collection of money, estimated to eventually total $8.8 billion, it still owed in 2001 for the construction of power plants and other facilities in the 1970s and 1980s.

"The Ohio transition plan is enormously complex and very unique," Marsh said, adding that when the company's own audit committee began looking at the charges a few months ago, it decided they ought to be re-audited. Independent auditor PriceWaterhouseCooper concurred. The accounting firm last year replaced FirstEnergy's longtime - but now defunct - auditor, Arthur Andersen.

The new audit of transition costs could scuttle whatever informal agreements the company has discussed with state officials to extend the current rate freeze beyond 2005, said company spokesman Ralph DiNicola, though he added that the company still wants to consider it.

FirstEnergy said that without the four major financial hits it took during the quarter, it would have earned $152.1 million, or 52 cents per share, on revenue of $2.9 billion.

The setbacks include:

A one-time charge of $158.5 million, or 32 cents per share, based on the New Jersey Board of Public Utilities decision to limit the amount of deferred costs that Jersey Central Power & Light can collect. FirstEnergy acquired JCP&L when it bought GPU.

A one-time charge of $67 million, or 23 cents per share, for relinquishing its interests in a South American utility owned by GPU.

Pre-tax costs associated with Davis-Besse totaling $63 million during the quarter, counted as a $37 million, or 13 cents-per-share, after-tax hit on earnings. Longer than anticipated shutdowns at the Perry nuclear power plant and Beaver Valley nuclear plant in Shippingport, Pa., also had an impact, said Marsh.

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