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Posted on Thu, Aug. 07, 2003 story:PUB_DESC
Analysts, investors recover from loss
FirstEnergy stock gains after shock fades from earnings restatement

Beacon Journal business writer

Investors in FirstEnergy Corp., calmed down Wednesday, a day after a surprise loss and earnings restatement sent the utility's stock price plummeting.

FirstEnergy Corp. stock rebounded slightly and the Akron utility's bonds were among corporate bonds that fell during trading Wednesday.

Shares in FirstEnergy rose 44 cents, or 1.4 percent, to close at $31.77. Tuesday, shares fell 8.5 percent after the company announced it had a $57.9 million second quarter loss and will restate earnings going back to 2002.

Paul Fremont, an analyst with Jefferies & Co. Inc., said the restatement of earnings did not appear, to him, to indicate serious problems at FirstEnergy.

The restatement may largely be a function of changing auditors from Arthur Andersen to PriceWaterhouseCoopers, he said.

``I don't see this as comparable to situations where companies engaged in questionable trading practices or business practices,'' he said. ``I see this purely as an accounting issue, not as a way they affect their fundamental business.''

Bloomberg News reported that FirstEnergy bonds were among other U.S. corporate bonds that fell because of falling investor optimism over company profits. It was the second day that FirstEnergy debt fell.

``FirstEnergy is under pressure and spreads are widening on disappointment about its reported loss,'' Tom Donne, who manages about $2 billion in fixed income assets for Banc One Investments Advisors in Columbus, told Bloomberg News.

FirstEnergy's 6.45 percent notes that mature in November 2011 fell in price, meaning their yield spread rose. Widening spreads indicate that investors feel the bonds are more risky and therefore they want more yield to compensate for the risk, Bloomberg reported.

One analyst upgraded FirstEnergy stock Wednesday to ``outperform,'' another downgraded the stock from ``buy'' to ``neutral,'' while four analysts maintained ``hold,'' ``overweight'' or ``outperform'' ratings after releasing revised reports following the company's earnings news.

Fremont at Jefferies & Co. Inc., said he is maintaining a ``buy'' rating on FirstEnergy. He did not issue a new report following the company's earnings announcement.

``We believe (the stock) is attractive, but it's not without issues, it's not without risk,'' he said.

Fremont also said he is keeping an eye on talks between Ohio regulators and FirstEnergy about extending a rate freeze into 2006 and beyond and is watching for news about when the DavisBesse nuclear plant will restart.

FirstEnergy's latest statement said it believes the plant, in Oak Harbor along Lake Erie, will be ready to restart in the fall. Ever since a large corrosion hole was found in March 2002 on top of the plant's nuclear reactor, the company has issued statements saying it believed Davis-Besse would be ready to restart in a matter of a month or two. The Nuclear Regulatory Commission has final say.

``Clearly, management has lost all credibility in being able to predict a reasonable timeframe for restart,'' Fremont said. ``I think people pretty much ignore (company) statements on restart.''

Fremont and other analysts think it is likely that FirstEnergy will issue more stock before the year is up to help its credit rating. Fremont said he has already built an equity issue into his analysis of the company's finances for this year.

Issuing new stock would dilute the shares held by existing shareholders, Fremont said. In essence, the company would have the same net income but spread it around more shares, meaning there would be less net income per share, he said.

Analyst Warwick Busfield at Fahnestock & Co. downgraded FirstEnergy from a ``buy'' to a ``neutral'' rating on Wednesday because of the disappointing quarter and earnings outlook.

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