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Sale, Bankruptcy Among Options For FirstEnergy's Competitive Power Generation Segment

The competitive power generation business is dragging down FirstEnergy Corp. and the company wants out, management said last week when it highlighted a plan to possibly sell up to 13 power plants in Ohio and Pennsylvania or file for bankruptcy to protect the rest of its business from the segment.

"Competitive market conditions continue to deteriorate, punctuated by weak power prices, insufficient results from recent capacity auctions and anemic demand forecasts," CEO Charles Jones told analysts during the company's third quarter earnings call on Friday. "The fact is competitive generation is weighing down the rest of our company."

He said a strategic review of the company's competitive generation business is currently underway as it aims to become a fully regulated company as soon as possible. The deregulated wholesale power market has been upended by low-cost shale gas, which has driven down prices and made it difficult for FirstEnergy's coal and nuclear facilities to compete. The company said it hopes to execute on its review in the next 12-18 months.

The company is exploring the sale of 13 power plants, including six natural gas-fired facilities, four coal plants and three nuclear plants as well as hydroelectric assets. If it can't sell, the company said it could be forced to close some of the plants.

In any event, it has to act fast. FirstEnergy Solutions (FES), which makes up part of the company's competitive energy services segment, has $515 million of debt maturing in 2018. Without the ability to extend or refinance that debt, Jones said FES could be forced to seek bankruptcy protection.

How a sale of plants or a bankruptcy would affect the company at large remains unclear for now as it navigates how to move forward, management said. In April, the Federal Energy Regulatory Commission blocked controversial power purchase agreements approved by Ohio regulators that would have guaranteed cost recovery in the open market for American Electric Power Co. and FirstEnergy's uneconomic coal and nuclear generating units in the state (see Daily GPI, April 28).

The company faces headwinds in its regulated business as well. It had asked for $558 million to help fund grid modernization, but Ohio regulators approved just $204 million. Much of the company's regulated growth is forecast to come in transmission spending, but it now has to issue $500 million in equity each year to fund it, which would likely dilute earnings per share.

Another way to preserve its remaining generating assets would be to push for reform in Ohio's deregulated power market. After the election on Tuesday, the company said it would begin "legislative and regulatory efforts" to do so, but analysts view that as a slow process that's not likely to tip the scales in FirstEnergy's favor. They also warned that it could take longer than 12-18 months to sell plants if that’s what the company decides to do.

FirstEnergy has already reported a net loss of $381 million (minus 90 cents/share) through the first nine months of the year and it has forecast a steeper than expected loss for the full-year. FES is projected to lose $300 million in earnings before interest, taxes, depreciation and amortization annually from 2016 through 2018, which is likely to impede overall growth for FirstEnergy, analysts said.

"We are optimistic that solutions can be found during this strategic review to keep as many of our generating units running as possible," Jones said. "Closing plants is an extremely difficult step, both for me personally and for our company, because keeping them viable is in the best interest of our electric customers, the states, the communities where the plants are located and our employees. But we believe theses actions are the right ones for our future."

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