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Published: 8/24/2003

FirstEnergy insists fears of cash woes unfounded

BY GARY T. PAKULSKI
BLADE BUSINESS WRITER

On top of questions about a possible role in North America's largest blackout, FirstEnergy Corp.'s finances are under scrutiny.

Some analysts expressed concern last week about cash flow at the utility, based in Akron, after executives filed a quarterly financial report with the U.S. Securities & Exchange Commission.

Carol Levenson of New York-based Gimme Credit wrote Wednesday that the report is “troubling.”

Ralph DiNicola, spokesman for the parent of Toledo Edison, said fears were misplaced.

“Certainly ... we have work to do,” Mr. DiNicola said. “But it is not gloom and doom ... We still expect to generate better than $575 million this year that will be available for debt reduction."

He said the firm's double-digit stock price is evidence that FirstEnergy is far from a financial basket case. Shares closed Friday at $28.30, down 46 cents in New York Stock Exchange trading. But that was above the close Monday, when investors, fearing possible financial liability from the blackout that affected 50 million people in the United States and Canada, sent the stock down 9 percent.

What concerned Ms. Levenson, however, was a deterioration in a number of areas of the firm's balance sheet.

Cash flow from operations - essentially the money that the firm has to pay its bills - fell to $22 million in the second quarter from $240 million at the same time last year and $440 million in the first quarter of 2003.

The firm's short-term debt, or debt that has to be repaid within the next year, was $2.4 billion in June, down a less-than-expected $100 million from March.

And the firm was nearly maxed out on its bank credit line, Ms. Levenson noted.

Mr. DiNicola disputed that the cash-flow figures indicate a financial problem. He said comparing cash flow from one quarter with another does not necessarily paint an accurate picture, because money can be used on things such as paying down debt.

The firm went through $235.8 million from the end of March to the end of June, leaving it with 22 percent of the cash it started with in the second quarter, according to the SEC filing.

The report showed “cash and cash equivalents” on June 30, the end of this year's second quarter, of $64.2 million, compared with $290 million when the quarter began and $359.1 million at the same point of 2002.

Other analysts, while agreeing that the report is troubling, said the firm's financial problems are temporary and will be largely resolved when the Davis-Besse nuclear power station near Oak Harbor returns to service.

The utility expects the facility to resume electricity production this fall, but nuclear industry regulators will determine the exact date. FirstEnergy expects repairs to Davis-Besse, along with the costs of replacement energy, to reach $80 million in 2003. Davis-Besse has been closed for 18 months because of corrosion in its nuclear reactor head.

The financial report that raised questions about the firm's finances was filed Wednesday with the SEC. It was delayed because of accounting changes.

The company announced Aug. 5 that it lost $58 million on revenue of $2.9 billion in the second quarter. Executives also said they were restating earnings for several prior quarters. Correction of the mistakes, which involve depreciation and overvaluation of certain assets, will reduce profit through 2005.

Questions about FirstEnergy's balance sheet surfaced in the same week that analysts expressed concerns about possible legal liability for the blackout that shut off electricity from New York to Detroit and Toronto.

Reports have pointed to problems on FirstEnergy transmission lines near Cleveland Aug. 14 that might have tripped automatic shut-off switches at power plants and transmission lines in adjoining areas.

Company officials say it is premature to assess blame and that other power companies were experiencing problems that could have sparked the cascading power shutdowns.

Still, the credit-rating agency Standard & Poor's said it is studying a possible downgrade.

Noting that press reports suggested the blackout started on FirstEnergy's electrical “grid,” a stock analyst at Goldman Sachs wrote on Monday that it “marks another bad development for a company that has had a long list of difficulties this year.”



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