01—Abstract
Summary
Summary of the 10-K/A filed August 19, 2003. Cited figures are marked; the original filing is the authoritative source.
FirstEnergy Corp. (FE) filed Amendment No. 2 to its 2002 Form 10-K on August 19, 2003, a combined filing with Ohio Edison, Cleveland Electric and Toledo Edison.
The amendment restates 2002 results (and multiple prior years for CEI and TE) principally to change how Ohio transition costs are amortized and to record above-market lease liabilities from the 1997 Centerior merger. The restatement reduces 2002 net income by about $76 milliona, or $0.26 per share, and the restated 2002 net income is $552.8 million (basic EPS $1.89) versus $629.3 million previously reported, with the Emdersa discontinued-operations reclassification also reflected. The filing arrives amid several pressures: an extended Davis-Besse nuclear outage (restart expected in the fall of 2003, with incremental 2002 costs of about $234.5 million), a July 2003 New Jersey ruling that cut JCP&L revenues by about $62 million and triggered a $158 million second-quarter charge, and an August 7, 2003 federal court ruling that the Sammis plant required pre-construction permits under the Clean Air Act, with potentially material penalties and capital costs.
Management also disclosed five shareholder suits tied to the restatement and a August 14, 2003 Northeast blackout affecting about 1.4 million FirstEnergy customers. Credit agencies responded: Moody's placed ratings under review for possible downgrade, and S&P affirmed BBB but flagged deleveraging deviations.
For investors, the central issues are the quality of earnings after the restatement, the pace of debt reduction, the Davis-Besse return to service, and the regulatory and environmental contingencies. The restatement shifts earnings timing, with the amortization change reducing 2003 to 2005 net income and increasing it in later years, so near-term earnings expectations are lower.
02—Key points
Key Highlights
- Restated 2002 net income of $552.8 million (EPS $1.89), down about $76 million ($0.26 per share) from the originally reported figure, driven by transition-cost amortization changes and above-market lease adjustments.
- Restatement reduces net income by an estimated $51 million in 2003 and $43 million in 2004, with benefits in 2006 to 2008, shifting earnings timing.
- Davis-Besse nuclear plant remains offline; 2002 incremental costs were about $234.5 million, with 2003 maintenance of roughly $50 million and replacement power of $12-18 million per month, and restart expected in fall 2003.
- JCP&L New Jersey rate decision cut annual revenues by about $62 million and led to a $158 million ($94 million after-tax) second-quarter 2003 charge, with an 9.5% interim ROE.
- Sammis Plant ruling (August 7, 2003) found 11 projects needed Clean Air Act permits; remedy trial set for March 15, 2004, with potential material penalties and capital costs.
- Five shareholder securities suits were filed relating to the restatement, and an August 14, 2003 blackout affected about 1.4 million customers.
- Moody's placed ratings under review for possible downgrade on August 14, 2003, while S&P affirmed its BBB corporate rating on August 7, 2003 but flagged deleveraging deviations.
03—Questions
Frequently Asked Questions
Why did FirstEnergy restate its 2002 financial statements, and how much did it change earnings?
The restatement principally changes the method of amortizing Ohio transition costs under the effective interest method, so that only revenues tied to GAAP-recorded regulatory assets are considered, and it recognizes above-market lease liabilities from the 1997 Centerior merger. The after-tax effect reduced 2002 net income by $76 million, or $0.26 per share. The Emdersa Argentina operations were also reclassified to discontinued operations, producing a $87.5 million charge in 2002 results.
Will the restatement affect future earnings?
Yes, timing shifts. The filing expects reduced net income through 2005 (for example, about $51 million lower in 2003 and $43 million in 2004 for FirstEnergy), followed by higher net income from 2006 through 2017 as the lease liability reversal runs off. Investors should expect lower near-term earnings relative to prior guidance.
What are the biggest operational and financial risks disclosed?
The main risks include the delayed Davis-Besse restart (dependent on NRC approval), the New Jersey JCP&L rate outcome and possible appeal, the Sammis Plant litigation with potentially material penalties and emissions-control capital spending, and the pace of debt reduction, which credit agencies have flagged. Management could not predict the Sammis outcome or the cause of the August 2003 outage.
How are credit ratings and liquidity positioned?
Moody's placed FirstEnergy's ratings under review for possible downgrade on August 14, 2003, though it did not expect falling below investment grade. S&P affirmed its BBB corporate rating on August 7, 2003, but noted that deleveraging had deviated from the plan presented at the GPU merger and expected equity issuance or asset sales to maintain investment-grade status. The company reported $196.3 million of cash at year-end 2002 and $1.5 billion in revolving credit facilities, with $177 million available at year-end.
What legal and shareholder exposure arose from these events?
As of August 18, 2003, five shareholder-plaintiffs had filed separate securities-law complaints tied to the earnings restatement, seeking class certification, and management was still reviewing the suits. Management could not predict the outcome of the Sammis litigation, the NJ JCP&L appeal, or the class action over the July 1999 heat-storm outages.
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