FirstEnergy Corp.’s competitive arm FirstEnergy Solutions (FES) and several key subsidiaries, including FirstEnergy Nuclear Operating Co. (FENOC), on March 31 sought Chapter 11 bankruptcy protection. FirstEnergy said the move would facilitate an “orderly financial restructuring” and accelerate its strategy to become a fully regulated utility.
FES—the parent company of FE Aircraft Leasing Corp., FirstEnergy Generation, FirstEnergy Nuclear Generation—along with FirstEnergy Generation Mansfield Unit 1 Corp., Norton Energy Storage, and FENOC filed the voluntary petition seeking relief under Chapter 11 with the U.S. Bankruptcy Court for the Northern District of Ohio.
In aggregate, the companies have about $3.8 billion of funding indebtedness. FES, which sells power and related services to retail and wholesale customers in Illinois, Maryland, Michigan, New Jersey, Ohio, and Pennsylvania, in December 2017 reported total assets, liabilities, and capitalization of about $5.5 billion, but brought in revenues of about $3.1 billion.
FES holds about $1.5 billion of funded indebtedness, including a $700 million secured revolving credit facility; about $332 million of 6.05% of unsecured notes, which are due in 2021; about $363 million of 8.80% unsecured notes due in 2039; and a $150 million revolving credit note with Allegheny Energy Supply Co., under which $102 million is outstanding, due on April 2.
FirstEnergy Generation, which owns and operates three fossil plants in Ohio and one in Pennsylvania—a combined 5.4 GW, which it sells to FES—has about $1 billion of funded indebtedness.
FirstEnergy Sees a Silver Lining
The filing does not involve FirstEnergy or its distribution, transmission, regulated generation, or Allegheny Energy Supply (AE Supply) subsidiaries, which still hold competitive generation assets, FirstEnergy Corp. said in a March 31 statement. Charles E. Jones, president and chief executive officer of FirstEnergy, said: “The six million customers of our regulated utilities will continue to receive the same reliable service, while our regulated generation facilities will continue normal operations, with the same longstanding commitment to safety and the environment.”
However, while the filing will affect 3,076 of FirstEnergy’s 15,513 employees, the Akron, Ohio–based company noted that it marks a milestone in its much-publicized strategy to exit the competitive generation business and become a fully regulated utility company “with a stronger balance sheet, solid cash flows and more predictable earnings,” Jones said.
“FirstEnergy will remain focused on creating long-term value for its customers, employees and shareholders,” Jones said. “Simply put, we will be better positioned to deliver on the tremendous opportunities for customer-focused growth.”
A Shelter from Financial Headwinds
The filing comes days after FES told PJM Interconnection on March 28 that it will close three uneconomic nuclear plants in the regional transmission organization’s footprint: the 908-MW Davis-Besse Nuclear Power Station in Oak Harbor, Ohio, by 2020; the twin-unit 1,872-MW Beaver Valley Power Station in Shippingport, Pennsylvania, in 2021; and the 1,268-MW Perry Nuclear Power Plant in Perry, Ohio, in 2021.
In a much-criticized move, FES on March 29 also filed an application for an emergency order with the DOE under Section 202(c) of the Federal Power Act, urging Energy Secretary Rick Perry to “find an emergency condition exists” in PJM’s region, and to force PJM to compensate at-risk merchant nuclear and coal plants to maintain stability of the grid.
FirstEnergy, facing stiff financial headwinds exacerbated by market volatility that have shaken up FES’s finances, suffered steep losses in 2017. In January, as the company received a $2.5 billion equity injection from four private investment groups to boost its transition to a fully regulated utility company, it agreed to form a restructuring working group to maximize value and certainty, and “minimize the timing” to exit competitive generation.
FirstEnergy on March 31 noted it had plans for more than $10 billion in capital investments in its regulated businesses through 2021. These include 10 electric distribution utilities, which serve six million customers in Ohio, Pennsylvania, New Jersey, West Virginia, Maryland and New York, as well as its transmission operations, which include about 24,000 miles of lines and two regional transmission operation centers.
The company’s 3.8-GW regulated generation fleet includes four plants in West Virginia, Virginia, and New Jersey: the 1,098 MW coal-fired Fort Martin Plant in Maidsville, West Virginia; the 1,984 MW coal-fired Harrison Plant in Haywood, West Virginia; 487 MW of regulated generation at the Bath County Hydro facility in Warm Springs, Virginia; and 210 MW of hydro generation at the Yards Creek facility in Blairstown, New Jersey.
However, the company’s exit from competitive markets is not yet complete. Its AE Supply subsidiary still owns two competitive generation assets: the 1,300-MW Pleasants Plant in Willow Island, West Virginia—but that plant is slated to be shuttered by January 2019—and 713 MW of competitive generation at Bath County Hydro, whose sale is slated to close in the first half of the year, FirstEnergy said.
A Long and Complicated Process
For now, some industry experts project that FES’s bankruptcy proceedings will likely be lengthy and convoluted.
“FES has filed without a plan and with a slew of complicated legal issues that could keep it in Chapter 11 through the end of the year and beyond,” Jack Tracy, head of legal analysis at Debtwire—a firm that provides information about distressed debt and leveraged finance markets—told POWER on April 3. “What they have negotiated prior to the filing are several agreements with creditors on ‘how to proceed’ administratively with thorny issues like sorting out the claims between the company entities themselves and how to handle rejecting contracts related to the Bruce Mansfield Facility and determining creditor claims in respect thereto.”
Tracy noted that three protocols have been reached between the company and creditors governing “how to get to a restructuring plan or sale, how to deal with the Bruce Mansfield Facility related claims and how to determine the intercompany claims (specifically for shared services provided by a non-debtor and any amounts that may be owed by the non-debtor parent, among other claims).” Those protocols indicate timelines that extend well into December 2018. The claims disputes protocols show an agreed course of mutual discovery and mediation between the impacted parties as opposed to a full scale litigation, he said.
However, several hurdles could get in the way of those plans, he noted. “Once the Unsecured Creditors Committee is appointed, it will have its own view on how to proceed, and decide whether it wants to abide by these protocols and whether it wants to run its own independent investigations. This is also a highly complicated and very large case before a court that typically doesn’t see many of these kinds of cases—the Northern District of Ohio.”
According to Tracey, the ultimate outcome is “anyone’s guess.” No deals or plans are on the table, he noted. “The company has proposed with its creditors to pursue a dual-track plan over the next few months. It is agreeing to be under a no-shop provision for its nuclear assets—basically, it can’t solicit buyers for 180 days—while it works to reorganize around those assets with its creditors. However, bids can still come in should someone have an offer. On the other hand, the company will continue to market its non-nuclear assets in hopes of a sale.”
—Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)
Updated on April 3 to reflect analysis from Jack Tracy, head of legal analysis at Debtwire