FirstEnergy to review consolidating Ohio, Pa. utilities

FirstEnergy Corp. will consider combining its Ohio utilities and, separately, its Pennsylvania entities in a move executives believe could create efficiencies and improve access to capital markets.

FirstEnergy operates through the Ohio Edison Co., The Toledo Edison Co. and The Cleveland Electric Illuminating Co. utility subsidiaries in Ohio. In Pennsylvania, the company operates through the Metropolitan Edison Co., Pennsylvania Electric Co., Pennsylvania Power Co. and West Penn Power Co. subsidiaries.

"We are reviewing the legal entity and financial consolidation because we believe the time is right to stand a team up and do a very thorough review of the opportunity," FirstEnergy President and CEO Steven Strah said April 22 on the company's first-quarter earnings call.

Strah said the company has fielded questions over the years about consolidating the companies and is exploring the possibility as part of the "comprehensive review" of opportunities within the organization.

"The potential benefits, to me, are the potential for increased efficiencies in some of our administrative functions, and there is also a possibility that it could provide us better access to capital markets," Strah said.

Transmission deal update

FirstEnergy also is on track for a second-quarter close of the $2.4 billion sale of a 19.9% stake in subsidiary FirstEnergy Transmission LLC to Brookfield Super-Core Infrastructure Partners LP.

The Committee on Foreign Investment in the United States notified FirstEnergy Transmission and Brookfield the week before the earnings call that it had found "no unresolved national security issues and its review of the transaction was concluded," Strah said. The deal remains subject to approval by the Federal Energy Regulatory Commission.

At the time of the stake sale agreement in November 2021, FirstEnergy management also announced the issuance of $1 billion of common stock to Blackstone Infrastructure Partners LP at $39.08 per share. The company consummated the private placement in December 2021 and has agreed to nominate a director candidate recommended by Blackstone at its May 17 shareholder meeting.

The combined $3.4 billion in proceeds from the transactions is expected to boost FirstEnergy's balance sheet, eliminate near-term equity needs and support the company's $17 billion capital plan through 2025.

This financing plan includes reducing about $1.35 billion in parent company debt as FirstEnergy continues to target a 13% ratio of funds from operations to debt no later than 2024.

Jon Taylor, FirstEnergy's senior vice president and CFO, said the company recently had "very productive" meetings with rating agencies about culture changes and the financial plan. Fitch and Moody's have positive outlooks on FirstEnergy.

"And I think as long as we continue to execute, I'm optimistic that they're going to be in a position to upgrade us sometime this year," Taylor said. "Now for [S&P Global Ratings], they have us on a stable outlook. They have a little bit of a different timeline. But from the conversations that we had, I do anticipate that they could be in a position to at least have an outlook change maybe as early as the fourth quarter."

The CFO said FirstEnergy will decide later this year how to deploy the remaining $800 million from the transmission stake sale, which could go toward pension contributions, reducing corporate debt or funding capital expenditure.

Taylor said the recent market volatility and steep increases in interest rates have impacted the company's pension plan.

"While the funded status has improved from 82% at the end of 2021 to 84%, the volatility in the interest rate and equity markets has created a potential headwind for higher pension expense in 2023 and beyond," Taylor said.

The management team also said FirstEnergy reached a $37.5 million settlement in a ratepayer civil lawsuit tied to the Ohio bribery investigation.

The settlement comes after the company in February announced it agreed to refresh its board of directors, allow an independent review of its current executive team, and increase oversight of political and lobbying activities as part of a settlement that resolves multiple shareholder lawsuits.

Results

FirstEnergy on April 21 reported first-quarter operating earnings of 60 cents per share, down from first-quarter 2021 operating earnings of 69 cents per share.

The S&P Capital IQ normalized consensus EPS estimate for the quarter was 62 cents.

The company reaffirmed its full-year 2022 operating earnings guidance range of $2.30 to $2.50 per share and said it expects to post operating earnings of 46 cents to 56 cents per share for the second quarter.

FirstEnergy also reaffirmed its 6% to 8% long-term annual operating EPS growth rate.

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