Dive Brief:
- Shares of FirstEnergy jumped up yesterday in response to a $2.5 billion equity investment from a a group of investors helping the company transform into a a fully-regulated utility and away from its merchant generation activities.
- Moody's Investor Services gave the deal high marks, calling it "a step in the right direction," and said FirstEnergy's exposure to FirstEnergy Solutions Corp. is "manageable." Funds from the private offering will be used to reduce holding company debt, contribute to its pension fund, and for general corporate purposes.
- FirstEnergy has been publicly seeking to exit the competitive generation business since federal regulators blocked subsidies for its struggling Ohio generation in 2016. The company recently supported the Department of Energy's push for coal and nuclear subsidies, but federal electricity regulators denied its plan this month.
Dive Insight:
Shares of FirstEnergy closed up about 10% yesterday on news of the cash infusion and progress on getting out of the merchant business. As cheap gas has pushed down power prices and demand has stagnated, the company's competitive generation, particularly coal and nuclear units, has struggled.
The investment includes $1.62 billion in mandatory convertible preferred equity and $850 million of common equity from a group of investors that includes affiliates of Elliott Management Corp., Bluescape, GIC, and Zimmer Partners LP.
FirstEnergy said it will form a Restructuring Working Group (RWG) to "maximize value and certainty" while cutting the time it takes to exit competitive generation. As a result of the investment, the company said it does not anticipate the need to issue additional equity through the end of 2020, excepting stock investment plans and employee benefits programs.
The working group will advise management regarding the restructuring of FirstEnergy Solutions, in the event the FES Board decides to seek bankruptcy protection.
Charles Jones, president and CEO of FirstEnergy, said in a statement that the investment will enable the company to "accelerate growth and infrastructure improvement plans for our transmission and distribution business, which will benefit our six million customers."
"These premier investors are demonstrating confidence in our plan to transform FirstEnergy into a fully regulated utility," said Jones. "Elliott and Bluescape have proven value-added expertise and investment acumen in power and utility restructurings."
In a letter to FirstEnergy investors, the company called the deal a "landmark investment" that will help in "unlocking the full value of FE for all shareholders."
In 2016, FirstEnergy announced it was considering selling more than a dozen power plants which were struggling, while it worked on a plan to re-regulate the Ohio market. At that time, FirstEnergy's Jones said in a conference call that the company is "looking to convert competitive generation to a regulated or regulated-light construct in Ohio, while seeking a solution for nuclear units in Ohio and Pennsylvania."
Ultimately, FirstEnergy opted to exit the merchant business entirely. Moody's said it sees FirstEnergy's exposure to FirstEnergy Solutions as "manageable."
"In today's equity announcement, FirstEnergy stated it has formed an internal restructuring working group to navigate through its exit from competitive generation. Moody's views this as a step in the right direction and is consistent with management's intent to exit the merchant generation business," the ratings agency said.
Jeff Rosenbaum, portfolio manager at Elliott, said investors are supportive of FirstEnergy's transition "to a pure-play collection of pristine, fully regulated utility companies. We believe a strengthened balance sheet, coupled with the creation of the RWG, will assist in navigating this transition and lead to tremendous value creation and certainty for FirstEnergy shareholders."
