FirstEnergy to settle lawsuits for $89.9M

7/28/2004

FirstEnergy Corp. of Akron yesterday said it would pay nearly $90 million to settle a series of lawsuits that accused the utility of misleading investors in recent years in connection with its financial restatements, the extended outage of its Davis-Besse nuclear plant, and the company's role in the Aug. 14 blackout.

The company admitted no guilt in the settlement, which is subject to court approval. The settlement would require the parent firm of Toledo Edison to hire an ethics officer, would bar the company's chief executive from also being named chairman, and would mandate that two-thirds of board members be independent.

One attorney representing a group of plaintiffs called the corporate governance agreement precedent setting.

Shareholders are to receive the settlement money after their attorneys are paid. Attorneys typically receive about a third of the pot. If the settlement is divided evenly among FirstEnergy's 224 million shares outstanding, it would mean the holder of one share would get about 27 cents.

The firm's insurance carrier is to pay $71.9 million of the $89.9 million settlement. The utility said it would result in a 3-cent a share charge against earnings in its second quarter.

"While we believe our legal position is strong with respect to these cases, today's settlement represents a reasonable resolution of the issues, considering the cost and effort that would have been required to proceed through the courts," Anthony Alexander, FirstEnergy president and chief executive, said in a statement.

Company officials could not be reached for comment last night.

The settlement announcement was made after the stock market closed yesterday, so there was no immediate effect on the firm's shares, which closed at $37.92.

At least 14 class-action securities lawsuits were filed against FirstEnergy Corp. last August when the company announced it would restate its earnings going back to 2002.

The securities lawsuits claimed shareholders who bought stock between April 24, 2000, and Aug. 5, 2003, were misled by the utility and some officers, including Chairman H. Peter Burg, who died in January.

The lawsuits said the defendants violated the U.S. Securities Exchange Act by issuing a series of material misrepresentations that inflated the company's assets and income, making it look more attractive to prospective investors. The financial restatements reduced profits by $99 million.

Some suits accused the firm and executives of misstating the asset values and status of Davis-Besse, the Oak Harbor power plant which was shut down for two years for repairs to a cracked reactor head.

One lawsuit contended FirstEnergy failed to disclose that its operating system had fallen into disrepair, contributing to the Aug. 14 blackout that knocked out power for 50 million people from Ohio to New York, and in Canada. A joint U.S.-Canada task force cited lapses by FirstEnergy, including failure to cut trees under transmission lines, for triggering the power failure.

Further, at least one lawsuit called for changes in the utility's corporate governance. That case, filed by the Teachers Retirement System of Louisiana, which owned stock in FirstEnergy, was settled for $25 million, which is part of the total settlement.

Settlement of the latter suit also would provide for the adoption of an extensive corporate governance plan by the FirstEnergy board. The governance plan would be designed to ensure greater accountability to shareholders and more rigorous oversight of the firm's compliance with internal controls and regulatory requirements.

"We think this is precedent-setting," said Blair Nicholas, a partner at Bernstein Litowitz Berger & Grossmann, the New York law firm that brought the suit on behalf of the teachers' retirement system.

"There needs to be more accountability and this provides it," he said.

Many of the reforms required under the plan are being considered or have been proposed by the U.S. Securities and Exchange Commission for all publicly traded U.S. companies.

One key change is the splitting of the chairman and chief executive officer posts, which had been held by Mr. Burg.

The current CEO, however, named in the last six months, does not hold the chairman title. That is held by Toledoan Robert Savage, who has been a board member for years.

The governance changes also would require the utility to have its compensation committee evaluate the chief executive's performance on an annual basis and hire a chief ethics officer to develop and implement policies and practices to benefit shareholders. A program would be set up to allow employees to confidentially report concerns to the ethics officer.

The lawsuits, filed in different federal courts, have been consolidated in U.S. District Court in Akron. Two state court cases are pending.

Contact Jon Chavez at

jchavez@theblade.com

or 419-724-6128.