FirstEnergy: No plans to sell debt after downgrades from S&P, Fitch

By Devika Patel

Knoxville, Tenn., Nov. 2 – FirstEnergy Corp. has plenty of liquidity, standing at $3.5 billion at the end of the last quarter, and no plans to issue debt amidst a scandal that has affected the company’s ability to sell future debt.

“We have no plans to increase debt at the FirstEnergy Holdco,” senior vice president and chief financial officer K. Jon Taylor said on the company’s third quarter ended Sept. 30 earnings conference call on Monday.

Perhaps that is just as well. On Oct. 30, S&P lowered the issuer ratings for FirstEnergy and its subsidiaries, and Fitch did as well, as a result of an ongoing investigation into the companies’ executives.

In July, federal authorities accused Republican Ohio House Speaker Larry Householder of orchestrating a $60 million bribery scheme involving money secretly funneled to them by FirstEnergy executives in exchange for passing a $1 billion legislative bailout, named House Bill 6 and enacted during 2019, for two unprofitable nuclear plants previously owned by FirstEnergy.

“The government says the energy company money was funneled through Generation Now, a group created to promote ‘social welfare’ under a provision of federal tax law that shields its funding source or spending,” the Associated Press reported on Oct. 29.

“The government says part of the scheme involved bribing or otherwise discouraging signature gatherers from doing their job. Generation Now is charged as a corporation in the case,” according to the Associated Press.

Last week, the company announced that it had terminated then chief executive officer Charles E. Jones’ employment and that Steven E. Strah was replacing Jones as acting CEO.

“During the course of our internal review related to the ongoing government investigation regarding House Bill 6, the independent review committee of the board determined that three executives violated certain FirstEnergy policies and its code of conduct,” executive director Christopher Pappas said on the call.

“When we determine that employee conduct is inconsistent with our policy and values, no matter how senior the individual, we have a duty to take action and that is what we have done here,” Pappas said.

“As a result, FirstEnergy announced on Thursday that CEO Chuck Jones, along with Dennis Chac, senior vice president of product development, marketing and branding, and Mike Dowling, senior vice president of external affairs, were all terminated, effective immediately.

“Concurrently, Steve Straw, who many of you know from his roles as FirstEnergy’s president and previously CFO, was appointed acting CEO,” Pappas said.

The company is being investigated by both the U.S. government as well as the Securities and Exchange Commission.

“I will note that the [U.S. Department of Justice] investigation prompted a number of shareholder and customer lawsuits and we are also responding to a subpoena we received from the [SEC] on Sept. 2 related to the investigation into FirstEnergy by the [SEC Division of Enforcement],” Pappas said.

“We are cooperating with the [Department of Justice] and the [SEC]” Pappas said.

The company does not expect that these issues will affect its financial results, but management has delayed filing its 10-Q with the SEC until it is certain that all information has been disclosed.

“While we traditionally follow the 10-Q in connection with our call, we don’t expect to file it this week as we continue our review and closing procedures to ensure we provide appropriate disclosure,” Taylor said.

“Also, the violations of certain company policy and code of conduct by the terminated executives has caused us to reevaluate our controls framework, and that could lead to identifying one or more material weaknesses.

“However, based on our review of these issues, we do not expect any impact on our financial results,” Taylor said.

Liquidity is excellent.

“First, from a liquidity perspective, I’ll remind you that we continue to have access to $3.5 billion of credit facilities committed through December 2022,” Taylor said.

“These facilities are substantially undrawn, with only $150 million borrowed and we remain in compliance with all covenants,” Taylor said.

Last week, S&P downgraded the issuer ratings for FirstEnergy and its subsidiaries to BB+ from BBB- and Fitch also downgraded them to BBB- from BBB.

“Today’s actions follow the July 2020 announcement and CreditWatch listing of FirstEnergy and its subsidiaries related to a U.S. government criminal complaint against the Speaker of the Ohio House of Representatives and four associates for participating in an approximately $60 million racketeering scheme,” S&P stated in a press release.

“The complaint alleges that the participants were bribed from March 2017 [to] March 2020 in exchange for help in passing House Bill 6.

“House Bill 6 was enacted during 2019 and established support for nuclear energy supply in Ohio and a decoupling mechanism for Ohio electric utilities.

“Although FirstEnergy has not been named as a defendant in the criminal complaint, we believe the severity of the charges outlined in the compliant, and the allegation that bribery payments began as early as March 2017, prior to Energy Harbor’s emergence from bankruptcy under its new ownership, could possibly implicate [FirstEnergy] in some manner.

“The two-notch downgrade reflects the termination of the company’s CEO Chuck Jones and two other executives, for violating company policies and its code of conduct.

“We view the severity of these violations at the highest level within the company as demonstrative of insufficient internal controls and cultural weakness. We view these violations as significantly outside of industry norms and, in our view, represent a material deficiency in the company’s governance,” S&P stated.

The diversified energy holding company is based in Akron, Ohio.

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