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Posted on Wed, Aug. 06, 2003 story:PUB_DESC
Utility shocks investors
FirstEnergy to restate earnings going back to 2002, says it lost $57.9 million for second quarter, will have lower profits

Beacon Journal business writer

FirstEnergy Corp. stunned investors Tuesday by announcing it will restate earnings going back to 2002, while also saying it lost $57.9 million for the second quarter and will have lower profits for the year.

Shares in the Akron-based utility plunged 8.5 percent, or $2.92, to $31.33 on the news. Shares dropped as low as $30.75 before bouncing back just before the stock market closed.

The earnings restatement is needed largely because of accounting changes related to Ohio's electricity deregulation program, the company said.

FirstEnergy's earnings this year have been hurt by higher-than-expected electricity expenses, longer-than-anticipated outages at its nuclear plants, and other factors including mild weather that slowed electricity sales.

The company said it will restate earnings for 2002 and for the first quarter of 2003.

The earnings restatement was necessary after the company told its new auditors, PriceWaterhouseCoopers, to take another look at the way some of the company's assets were handled. The auditors changed the way the company amortized those assets, increasing their value in the restated period and reducing it in the future.

The result is to tell investors that the company did not earn as much in those five quarters as it reported earlier.

Company officials also said they will restate the 2001 and 2002 financial statements for subsidiaries Cleveland Electric Illuminating Co. and Toledo Edison.

FirstEnergy said it now expects to earn $2.68 to $2.88 per share in 2003, instead of the $3.35 to $3.55 per share it predicted earlier.

Also affecting FirstEnergy's bottom line:

 New Jersey public utility regulators in late July refused to grant the company a requested rate increase in that state. Because of that, FirstEnergy will take a one-time charge of $158.5 million, or 32 cents a share, this year, executives said.

 FirstEnergy decided to take a $67.4 million non-cash charge on the divestiture of shares in an Argentine asset.

 The shut-down Davis-Besse nuclear plant cost was pegged at $63 million for the quarter.

The decision to re-audit First-Energy's books was made recently by the company's audit committee, which then notified PriceWaterhouseCoopers, officials said. FirstEnergy hired the auditing firm in 2002, replacing disgraced accounting firm Arthur Andersen.

Because of the restatement, earnings through 2005 will be lower than previously expected. The restatements should result in increased earnings from 2006 through 2017, the company said.

Overall, FirstEnergy said the restatements are expected to increase net income by $381 million through 2017.

But investors were alarmed by the news.

``They should have disclosed some of these matters and some of these figures earlier,'' Edward Paik at Columbia management Group, whose holdings include FirstEnergy stock, told Bloomberg News. ``Their explanation of where the company is going wasn't very clear and investors just headed for the hills.''

Chairman and Chief Executive Officer H. Peter Burg was apologetic to investors. ``We should have done a better job the first half of the year.''

But Burg said he is confident that FirstEnergy will be able to increase earnings in 2004, and that he expected Davis-Besse to be ready to restart this fall. The troubled nuclear plant in Oak Harbor has been kept shut down since a large corrosion hole was found on top of the reactor in March 2002.

FirstEnergy Senior Vice President and Chief Financial Officer Richard Marsh said the company earlier this year decided it needed to look at how to account for so-called transition costs under the current Ohio deregulation plan, and how to treat those costs if state regulators extend FirstEnergy's rate freeze, due to expire at the end of 2005. To attract more electricity suppliers, FirstEnergy and regulators earlier this year said they were talking about whether a longer rate freeze is needed.

``The Ohio transition plan for FirstEnergy is enormously complex,'' Marsh told analysts in a conference call.

``They had a bad result and things don't look good,'' said Warwick Busfield, analyst with Fahnestock & Co.

FirstEnergy's announcement surprised him, he said. ``Management has to perform exceptionally well and they haven't done that.''

The decision to restate earnings ``reflects the fact that these were very complicated issues,'' FirstEnergy spokesman Ralph DiNicola said. The restatement is not a reflection on Arthur Andersen, FirstEnergy's previous auditing firm, he said.

FirstEnergy had second quarter revenue of $2.9 billion, the same as for the second quarter of 2002. FirstEnergy reported it had total revenue of $6.1 billion for the first half of the year, compared to $5.8 billion for the first half of 2002.

Jim Mackinnon can be reached at 330-996-3544 or
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