08/20/03

Last week's disastrous power failure sucker-punched FirstEnergy Corp.'s ailing finances at a time when the Akron utility is under mounting pressure to reduce its debt and tackle costly operational problems.

Now, bad publicity and potential regulatory and legal issues surrounding the blackout could make it even harder for the company to climb back onto stronger financial ground.

"It's the cockroach theory. The fear is where there's one, there's many. And FirstEnergy has already had a scattering of cockroaches," said analyst Jim Halloran of National City Bank in Cleveland.

Primarily, FirstEnergy has been under mounting pressure to shed some of its debt, which is at least $13 billion, much of it taken on with the 2001 purchase of New Jersey utility GPU Inc. The company's ratio of debt to total capital is 62 percent; that troubles investment analysts, because the industry average is about 59 percent.

Calling for a management overhaul, utilities analyst Dot Matthews of CreditSights in New York said analysts are disappointed because FirstEnergy vowed to reduce its debt through cash flow, but hasn't. "Their announced plan is not working," she said.

The company planned to raise up to $2 billion with a stock and debt offering but amid current uncertainty will find it difficult to get the prices it wants.

Its stock on Monday suffered its biggest one-day loss ever, plunging 9.3 percent. While it gained 21 cents yesterday to close at $27.96, it remains 27 percent below its high from seven weeks ago.

A new stock offering might not satisfy creditors anyway, Matthews said, and its dilutive effect could put FirstEnergy's attractive $1.50 per share dividend at risk.

Meanwhile, analysts are warning investors to stay away from FirstEnergy bonds until investigators pinpoint the cause of the power failure.

"The first fingers have been pointed toward [FirstEnergy], providing yet another reason to recommend that bond investors continue to avoid this name," wrote analysts at Gimme Credit Industrials in New York.

FirstEnergy also hoped to raise cash through the sale of four coal-fired plants in Ohio for $1.5 billion. But that deal fell through when the buyer, NRG Energy Inc. of Minneapolis, went bankrupt.

FirstEnergy's inability to raise cash fast will further hurt its standing with credit-rating services, Halloran said.

Standard & Poor's Ratings Services on Monday put FirstEnergy's barely-investment-grade credit rating on watch for a downgrade.

The warning "reflects Standard & Poor's concern that the investigations into the massive power outages . . . will further distract management from executing its strategy of deleveraging," wrote Standard & Poor's credit analyst Aneesh Prabhu.

Moody's Investors Service also said it may lower its rating on FirstEnergy.

"It's been like a circle of bad luck for FirstEnergy," said analyst Paul Larson of Morningstar Inc. in Chicago. "It's not easy to get in that circle, but when you're in it, it's hard to get out."

Also straining FirstEnergy's finances has been the cost of the unexpected idling of its Davis-Besse nuclear power plant, shut 18 months ago after workers found a corrosion hole in the reactor's lid. To date, the idling of Davis-Besse has cost FirstEnergy a total of $500 million and costs at least another $25 million each month it remains down.

Last month, instead of allowing an increase, regulators in New Jersey ordered the company to lower rates, in part because of a big outage over the July 4 weekend. FirstEnergy promised some $60 million in upgrades.

Early this month, a federal judge ruled the company violated the Clean Air Act by not installing pollution-control equipment at an Ohio coal plant. And the company stunned Wall Street by announcing it lost money in the second quarter, would restate earnings for the last five quarters and would reduce projected earnings through 2005 because of recommended accounting changes.

If the utility is found to be a key contributor to the blackout, it might have to pay an additional $375 million to upgrade Ohio transmission lines, said analyst Hugh Wynne of Sanford C. Bernstein in New York. He projected an 8 percent drop in FirstEnergy's 2004 earnings, to $2.77 per share.

In addition to upgrades, Halloran said FirstEnergy also could expect regulatory penalties. "There will be some financial consequences but not serious."

Halloran added that he believes FirstEnergy is a good company facing more than its share of challenges.

"There's nothing that can't be solved, but it's everything at the same time," he said.

To reach this Plain Dealer reporter:

tmurray@plaind.com, 216-999-4113