FirstEnergy Corp. could soon announce the sale of a minority stake in its FirstEnergy Transmission LLC subsidiary as part of a strategy to eliminate near-term equity needs.
FirstEnergy Executive Vice President and CFO K. Jon Taylor on an Oct. 29 call said the management team is "engaged in a process to sell a minority interest in our transmission holding company," which owns American Transmission Systems Inc., Mid-Atlantic Interstate Transmission and Trans-Allegheny Interstate Line Co.
"The interest is very strong and preliminary indications [on valuations] are very supportive of our financial plan and targets," Taylor said on the third-quarter earnings call.
Reports emerged in August that FirstEnergy has been working with advisers to sell a nearly 20% stake in its FirstEnergy Transmission subsidiary, with the potential to raise about $2.5 billion in equity.
The talks come after FirstEnergy executives signaled in April that the company could sell a partial stake in one of its electric utilities as it works to return to investment-grade credit ratings. Management now targets a funds-from-operations-to-debt ratio of 13%.
An asset sale, however, appeared less likely to some on Wall Street after the company on July 22 agreed to pay a $230 million fine as part of a three-year deferred prosecution agreement with the U.S. Justice Department for its role in an Ohio corruption scandal.
The next day, FirstEnergy executives told the investment community the company is moving forward with a planned asset sale, with options that "include a minority sale of distribution and/or transmission assets" to raise proceeds and help eliminate up to $1.2 billion in equity needs over 2022 and 2023.
FirstEnergy's stock was up more than 1% as of about 1 p.m. ET Oct. 29, after briefly spiking higher, in heavy trading as some investors signaled they expected a deal announcement.
Taylor said the company expects to provide an update on the business plan "in the next few weeks" and did not dismiss the potential for future asset sales to support "incremental and strategic capex."
"[W]e continue to think through different alternatives to accomplish this," Taylor said. "I think everything is on the table in terms of the go-forward plan."
In May, Reuters reported that FirstEnergy was evaluating selling part of Monongahela Power Co. as well as pieces of West Penn Power Co. and Potomac Edison Co. Analysts also have speculated that the company could partially monetize its Jersey Central Power & Light Co. utility. FirstEnergy has 10 electric distribution utilities in five states.
"[W]e feel as though we have the right strategic options in front of us right now and we are not taking anything unnecessarily off the table," FirstEnergy President and CEO Steven Strah told analysts and investors. "But at the end, we think we're in a very good place where we can propel this company forward and do that without sacrificing what I believe is a very strong footprint, a very strong business plan and a very strong strategy as being a pure-play [transmission and distribution] kind of regulated environment."
Taylor noted that the management team thought about certain financial and strategic aspects as it evaluated its portfolio before beginning the sale process at FirstEnergy Transmission.
"[W]e thought about, one, making sure that we could raise equity in an efficient manner for our shareholders. I think [FirstEnergy Transmission] is going to definitely check that box," Taylor said, adding it is also important to market a business that will attract "sophisticated high-quality investors where we can align on governance and business strategy type of issues."
"And I think from where we are today, [FirstEnergy Transmission] meets all of those criteria for us," Taylor said. "It's going to be a very efficient capital raise. It will be accretive to earnings. The investors that are in the mix are top-notch quality firms and they're very supportive of the business plan and very supportive of future transmission opportunities."
Q3 results
On Oct. 29, FirstEnergy reported third-quarter operating earnings of 82 cents per share, a slight drop from operating earnings of 84 cents per share in the third quarter of 2020.
The company also raised and narrowed its 2021 operating earnings guidance range to $2.55 to $2.65 per share from $2.40 to $2.60 per share.
