FirstEnergy Confirms FES Bankruptcy

Summary

• Time is running out for the company's unregulated subsidiary, FirstEnergy Solutions.
• FirstEnergy reported a fourth-quarter, pretax charge of $2.4 billion from plant write-downs and other exit costs.
• FirstEnergy's planned $10 billion investment into its local delivery systems and long-distance high-voltage transmission business is expected to result in 6 to 8 percent increase in earnings, annually.

It is the month of distressed utilities it seems. FirstEnergy's (NYSE: FE) top executive Charles "Chuck" Jones confirmed what I said in January - time is running out for the company's unregulated subsidiary, FirstEnergy Solutions (FES).

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Jones told analysts during a public teleconference that FirstEnergy Solutions has been operating independently since early last year and that FES will no longer have access to FirstEnergy's bank by the end of March.

However, before March 31, Jones said he expects FirstEnergy Solutions to borrow up to $100 million from FE's internal bank. Which sounds crazy, because those borrowed funds would make FirstEnergy a creditor in the subsidiary's Chapter 11. But perhaps this is a move to have first bid rights at FES's many assets.

"While I cannot speak for the unregulated business, I would be shocked if they go beyond the end of March without some type of filing," Jones said.

FirstEnergy Solutions owes a bond holder payment of about $100 million, which is due in early April and this payment will likely be what pushes FES to file bankruptcy. Moody's lowered the subsidiary's rating from below investment grade to likely in default.

Sooner the better in my opinion. FirstEnergy, which received a $2.5 billion equity injection from activist investor Elliott Management Corp. and others in January, just keeps losing money on FES. They reported a fourth-quarter, pretax charge of $2.4 billion from plant write-downs and other exit costs. In the year-earlier quarter they reported $9.22 billion in charges related to the planned exit from the unregulated business.

Jones said decisions about how to proceed with the coal and nuclear plants First Energy Solutions owns will be up the FES leadership. "It's FES' decision whether and how to bid in that upcoming [capacity] auction for the FES assets," he said. "It would be Allegheny Energy Supply's decision the same for the Pleasants Power Station, and it would be Mon Power's decision for the assets that are of Mon Power's."

FirstEnergy has lobbied lawmakers and the Trump administration to intervene and create special subsidies to keep its nuclear plants alive. But these efforts were likely an attempt to increase their value in a sell-off.

FirstEnergy argues that nuclear plants are essential for power diversity which will bring "resiliency" to the grid in the event of failures or attacks. But this argument has gone unsuccessful.

"I am personally disappointed that these endeavors haven't resulted in any meaningful legislative or regulatory support, given the importance of these plants to grid resiliency, reliable and affordable power and the region's economy," Jones said.

The Federal Energy Regulatory Commission has declined to create a special subsidy for old nuclear and coal plants.

On the other hand, FirstEnergy's regulated business is improving. Speaking about the company's finances Jones remarked "[2017] was a great year for our regulated business," Jones told analysts, "We are very excited about the transformation that is taking place at FirstEnergy, and for the opportunity to accelerate or regulated growth and infrastructure improvement plans."

Just yesterday FirstEnergy announced over $2.5 billion in investments into their Illuminating Company Service Area, WestPenn Power Area, MonPower Area, PotomacEdison Area, OhioEdison Service Area, ToledoEdison Service Area, PennPower Service Area, Jersey Central Power & Light Service Area, Penelec Service Area, and Met-Ed Service Area.

This news is just the beginning of FirstEnergy's planned $10 billion investment into its local delivery systems and long-distance high-voltage transmission business. These investments, FirstEnergy believes, will bring in a 6 to 8 percent increase in earnings, annually.

These investments must be cleared by the state utility commissions as well as the FERC. But once they are, they promise to bring a rate of return as much as 10 percent. For FE customers, this means bills will likely creep higher, but luckily for investors this also means stock prices are likely to creep higher as well.

There is an attractive upside to FE, and when the fears of FES bankruptcy subside, the market will likely take notice. Morningstar currently has FE listed as a Five Star Stock, implying a strong buy rating. Their target price, or "Fair Value Estimate," is set at $40, which means it is currently trading at a steep discount. Though there may be some price dips as news of bankruptcy for FES hits, along with the follow-on proceedings, I see the current share price as a good entry point.

This article is the latest chapter in my coverage of FE, and I will continue with updates for the next several months. If you enjoyed this article, please click the follow button beside my name, it will ensure you receive my next update direct to your feed. Don't miss it!

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.