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(FE) - Get FirstEnergy Corp. Report

, the utility most blamed for last week's record blackout, has a history of keeping its own shareholders in the dark.

Take the company's recent financial statements. In the second quarter, FirstEnergy's cash flow -- the one metric that analysts have long seized on to illustrate the utility's supposed strength -- plunged 83% to just $21.7 million. The biggest factor? A drop of $332 million in the "other" category.

Contacted Wednesday by

, FirstEnergy blamed the cash drain on a long refueling outage at one of its nuclear power plants. But the company offered no early warning about the plunge two weeks ago when it announced a second-quarter loss and looming restatements. Instead, it dwelled on noncash hits to its financial results.

"We're still largely on course from a cash basis," CFO Richard Marsh told analysts during a recent conference call.

But FirstEnergy is now depending on surprise cash infusions -- unrelated to operations -- to reach its reduced full-year cash flow target of $575 million. In the meantime, the cash on its balance sheet has shriveled to $64.2 million from $359 million in just a year.

FirstEnergy spokeswoman Kristen Baird admitted Wednesday that the company "didn't really get into specifics" about second-quarter cash flow before now.

New Math

Then there are the restatements. Filed at the close of business on Tuesday -- just in time to allow the company to sell stock in the near future under an existing shelf registration -- the restated financials cut FirstEnergy's 2002 profits by 26 cents a share. Earlier, the company had predicted the hit would be 3 cents lighter.

But then, what about the need for restatements in the first place? The company blamed the problem on a complex formula of recovering transition assets and recognizing above-market leases carried out by its old auditor, Arthur Andersen. But in early 2002 -- as other Andersen clients were bailing -- FirstEnergy spokesman Ralph DiNicola had this to say to

The Plain Dealer

in Cleveland: "The people who have worked on our accounts have done a stellar job."

Three months later, FirstEnergy ended its 70-year relationship with Andersen but kept its public support of the firm intact. After more than a year of studying FirstEnergy's books, replacement PriceWaterhouseCoopers ordered financial restatements that whacked the company's stock from record highs and triggered the inevitable slew of shareholder lawsuits.

Shares of FirstEnergy regained some lost ground on Wednesday, jumping 4.4% to $29.19, as investors breathed a sigh of relief over the prospect that the company soon will be able to raise cash by selling more stock.

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Deaf Ears

By now, FirstEnergy shareholders have been voicing their unhappiness for years. But the company hasn't necessarily been listening. Since 1999, FirstEnergy has four times refused to adopt proposals approved by the majority of its shareholders. One of those proposals would have limited the board's ability to ignore shareholder wishes. But the company continues to favor an unpopular policy that requires 80% approval for changes to important company rules -- including one that protects the directors' own jobs.

"An 80% supermajority vote is required to remove a director with cause," said national shareholder activist John Chevedden. "Removal would be virtually impossible since less than 80% of stock typically votes."

Instead, most FirstEnergy directors haven't budged from the board seats in a decade. And they have clear incentives to stay put.

For a year of service, they are entitled to $30,000 in cash, $40,000 in stock, $5,000 for chairing a committee and $1,500 for every board or industry meeting they attend. If they prefer, they can boost their compensation by trading the $30,000 in cash for $36,000 in deferred stock instead.

Blind Faith

Corporate executives also enjoy nice perks -- and expect shareholders to blindly agree that they've earned them. But two years ago, investors suddenly opened their eyes. They noted a vague passage in the company's proxy statement, saying bonuses are tied to "the achievement of confidential target levels regarding total shareholder return," and called for a fuller explanation. In a formal proposal to the board, shareholders went on to demand specific measurements for executive compensation.

The company protested that "such disclosure of sensitive and confidential information would put us at a disadvantage with respect to our competitors and suppliers." Only after arguing its case at length did FirstEnergy even reveal the text of the shareholder proposal buried lower in the proxy.

"They argue against a proposal even before they present it," Chevedden said. "When it comes to corporate governance, they're one of the most inhospitable companies I've seen."

And outsiders have taken notice. In the latest study by Rating Research LLC, FirstEnergy ranked as the least ethical company -- along with bankrupt PG&E -- in the battered utility industry. While it did achieve an average ethics rating overall, it was flagged for poor quality and high risk in the areas of ethical business practices, trustworthiness and openness and honesty with the public. The company didn't immediately respond to questions about the study or its governance practices.

Shopping Spree

Certainly, this week's financial statements weren't the first to bring unpleasant surprises. In early 1998, for instance, FirstEnergy quietly revealed $3.3 billion worth of write-offs it had taken months earlier during a merger that had doubled the company's size. Stunned investors had instead been expecting the company to take smaller writedowns over the course of several years.

Before then, experts actually had questioned the wisdom of the merger, which some said simply joined two weak utilities. FirstEnergy did proceed to grow and please some analysts. But by early 2000, the trade publication

Public Utilities Fortnightly

had declared the merger a failure. Ultimately, the publication concluded that most mergers destroy, rather than create, shareholder value and went on to question the motives behind them.

"We therefore question the zeal with which CEOs pursue acquisitions," it stated. "At best, they are ignorant of economic reality; at worst, they are self-serving."

Since then, FirstEnergy has completed another big merger that has doubled its size once again. But the merger has also left the company with a super-sized debt load that's tough for the market to stomach. And this time, the company's familiar strategy -- of slashing costs to boost returns -- has stirred up some investor heartburn.

In the brief years since the latest merger, FirstEnergy has found itself accused of neglecting crucial maintenance at a nuclear power plant, skipping out on pollution controls at another facility and -- the latest blow -- failing to adequately address warnings that may have led to last week's blackout.

Chevedden, for one, is not surprised. He says the company has been operating without proper oversight for years.

"There needs to be more accountability. You would hope," he concluded, "that they would start to see the light."