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