As his strategy unravels

Anthony Alexander should expect to be on the hot seat at Tuesday's FirstEnergy Board meeting

June 14, 2004

Shari Weir, Cleveland Program Director
Ohio Citizen Action

Anthony Alexander should expect to take the hot seat at tomorrow's FirstEnergy board of directors meeting to explain why his strategy is unravelling.

In his May 18 speech to shareholders, Alexander identified his goals for 2004: (1) improving operations, (2) getting approval of a new rate stabilization plan by Ohio regulators, (3) reducing debt and (4) delivering consistent financial results, according to coverage in the Akron Beacon Journal.

The last three are really the same, since Alexander has been counting on approval of the rate plan to reduce debt, reverse the plunge in its investment ratings, and restore Wall Street's confidence in the troubled firm.

1. Operations

"Improving operations" presumably starts with being able to turn on your generating plants.

Alexander finally got the Davis-Besse Nuclear Plant to full power on April 4.

Only ten days later, the Nuclear Regulatory Commission cited FirstEnergy for safety problems at its Perry plant, and said it would have to step up inspections there. "The NRC said it was not satisfied by the utility's evaluations of safety equipment and the company's failure to follow its emergency plan by declaring an alert soon after realizing a spent fuel assembly had been damaged. The latter resulted in higher radiation inside the plant's fuel storage area, the NRC said," according to the Toledo Blade.

According to an April 21 report in the Cleveland Plain Dealer, "The Midwest's top nuclear regulator warned FirstEnergy Corp. Tuesday [April 20] that its Perry power plant could come under even harsher scrutiny if things don't turn around at the facility. . . . the accumulated violations put Perry among the six most heavily monitored plants in the country, the NRC said. FirstEnergy's Davis-Besse plant near Toledo currently tops the list as the NRC's most heavily monitored facility. . ."

Then, only three days after Alexander's speech to the stockholders about improving operations, the Perry plant went down for weeks.

These events were predictable, given that FirstEnergy had been moving key employees from its Perry and Beaver Valley nuclear plants to Davis-Besse to get that plant started. Now Davis-Besse is up and Perry is in trouble.

Clearly, while FirstEnergy has three nuclear plants, it has trained personnel for fewer than three plants. This can only be the result of continuing operational incompetence by top management.

2. Rate plan

There is no way to overemphasize the importance of the FirstEnergy rate plan in Alexander's strategy. His company has survived only due to a $1 billion a year of overcharges, which were the result of a deal with regulators in 2000 which gave the company twice the nuclear construction expenses to which they were entitled. From management's point of view, continuing the overcharge is critical.

In a September 4, 2003 interview, Aneesh Prabhu of Standard and Poor's said that one of his "concerns about FirstEnergy's business profile" was as follows:
"FirstEnergy is also exposed to revenue and earnings erosion in 2006. In 2005, the company's weighted average generation transition charges in Ohio will be about 2.1 cents per kilowatt-hour (kWh), while the weighted average generation charge -- as set in the settlement -- will be about 3.3 cents per kWh. Therefore, in 2006, when generation transition charges expire, revenue from Ohio customers will be affected by the difference of 5.4 cents per kWh and the prevailing energy price in Ohio."
On November 21, 2003, the same analyst said, ". . . on balance, Standard & Poor’s will view an extension [of its Ohio rate plan] as supportive to FirstEnergy’s credit quality, as it will provide revenue and cash flow stability to the company’s operating subsidiaries."

New York's attention to the plan has continued this year. The Cleveland Plain Dealer reported on February 11, "The rate case has attracted the attention of Wall Street, where analysts have been concerned about FirstEnergy's ability to pay down the huge debt it incurred when it bought New Jersey-based utility GPU Inc. in 2001. . . 'FirstEnergy's ability to obtain a constructive long-term rate order from the PUCO will be critical to the company's future finances,' said Peggy Jones, bond analyst with ABN Amrow in New York.

All participants and observers believed three months ago that it was a cinch that Alexander would get every penny of the $3 billion he wanted from the PUCO.

Instead, last Wednesday, the Commission chopped $1 billion of the $3 billion in the plan, and opened the possibility that a competitive-bid auction this fall would lead to the deregulation required by the 1999 state law. Further, the whole case may well also go to the Ohio Supreme Court, since the Commission's conditional opinion and order runs afoul of state law. A trip to the high court means that the Company could lose altogether, or have the certainty of the rate plan delayed another six months to a year.

In other words, FirstEnergy's sure-thing has become a tangle of question-marks.

Why is Alexander the CEO?

If there's one reason why Alexander was chosen to be CEO, it is because the board thought him best qualified to secure the new FirstEnergy rate plan.

His ascension was emphatically not because of his reputation as a manager. For example, the Akron Beacon Journal reported on November 28, 2003 --
"'We are highly disappointed with the company's performance,' said [one prominent utilities analyst, Robert Rubin at New York-based Deutsche Bank], a credit analyst who covers FirstEnergy and other utilities. Rubin issued a research report on Monday that heavily criticized FirstEnergy management and has a sell recommendation on the company's bonds. . . . 'Operationally, it's a disaster. That points to (FirstEnergy President and Chief Operating Officer) Tony Alexander.' . . .Rubin said he is concerned that what he sees as continuing management issues will hurt the company's debt rating, which Standard & Poor's has on credit watch. S&P put the company on credit watch because FirstEnergy in August stunned investors when it said it needed to restate earnings going back a couple of years and lowered its earnings outlook for the year. 'We're going to carry the sell (recommendation on bonds) until management changes,' Rubin said. 'In my view, there is a corporate governance problem.... You need change to preserve integrity.' . . . 'In my view, if you think management has to change, you can't recommend the company.'

The FirstEnergy board ignored Rubin's advice. On December 22, 2003, it appointed Alexander acting CEO during CEO Peter Burg's illness. The next day, Standard and Poor's downgraded FirstEnergy's securities.

When Burg died in January, the Board did not wait 24 hours after his funeral to appoint Alexander the new CEO.

Why? Because the board thought what the company needed most was this rate plan. Alexander, as the political fixer, would be best able to make sure it happened. The guaranteed $3 billion would sweeten any takeover deal, and would make Wall Street happy either way.

Instead the rate plan is anything but guaranteed, and the board may be wondering why they picked Anthony Alexander to lead the company.