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Ouster of FirstEnergy CEO could underscore deeper ties to nuke subsidy scandal

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Essential Energy Insights - February 2021

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Ouster of FirstEnergy CEO could underscore deeper ties to nuke subsidy scandal

FirstEnergy Corp.'s decision to fire CEO Charles Jones Jr. has reignited concerns about the company's role in an alleged bribery scheme used to prop up the state's nuclear plants.

After market hours on Oct. 29, FirstEnergy's board of directors announced it had terminated Jones and two additional senior executives following an internal review around the company's role in the passage of Ohio's controversial nuclear subsidy law.

The announcement came on the same day as two men pleaded guilty to participating in a racketeering conspiracy designed to pass and uphold House Bill 6. A news release from the U.S. Attorney's Office for the Southern District of Ohio states one of the men, 41-year-old lobbyist Juan Cespedes, was "hired by an energy company to funnel money" into an enterprise used to support former Ohio House Speaker Larry Householder and the nuclear subsidies.

"[T]he news shows our previous view on the situation was flat out wrong," CreditSights analyst Andrew DeVries wrote in an Oct. 29 report. "The scandal evidently did not only extend to [FirstEnergy] but all the way to the top of [FirstEnergy], so this likely means shareholder and other lawsuits will proceed against the company and, even worse, [S&P Global Ratings] is likely to pull the trigger on their low BBB downgrade review to junk on ESG (governance, specifically) concerns."

In an Oct. 21 commentary, S&P Global Ratings said: "[I]f subsequent investigations directly implicate [FirstEnergy], we believe it could reflect a material deficiency in the company's governance, and may weaken what we assess as the company's management of regulatory risk."

FirstEnergy's stock was down nearly 4% in heavy mid-morning trading Oct. 30, and down about 5.7% at about 3 p.m. ET.

Guggenheim Securities LLC analyst Shahriar Pourreza said he spoke with FirstEnergy management after the announcement to terminate its CEO.

"While the investigation remains ongoing, [FirstEnergy] has had sufficient time to dig since August, and as a result we do not envision additional shoes to drop in the C-suite at this time," Pourreza wrote in an Oct. 30 report. "Chuck Jones was likely dismissed for improper behavior found during the process and was not a sacrificial lamb as some investors may believe."

The U.S. Attorney's Office and the Federal Bureau of Investigation on July 21 announced the filing of criminal charges against Householder and four associates accused of accepting more than $60 million in bribes and using a "slush fund" to steer H.B. 6 through the Ohio Legislature. An affidavit filed by an FBI special agent implies that FirstEnergy and affiliated entities, though not mentioned by name, wired funds through a 501(c)(4) nonprofit group called Generation Now to support H.B. 6 and Householder-backed candidates in the Ohio House of Representatives while defeating a ballot initiative to overturn the law.

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Wall Street's initial reaction to the criminal charges was largely negative. FirstEnergy's shares plunged nearly 40% over the course of two days as it became clear the company and its entities were described in the affidavit as the primary source of the "dark money" funding.

"[I]t seems quite likely to us that things will get worse for [FirstEnergy] before they get better," Scotia Capital (USA) Inc. analyst Andrew Weisel wrote in a July 22 research report.

FirstEnergy is "implicated to a much larger extent than we originally thought," DeVries wrote in a note to clients issued late July 21.

"I'm not sure on the timing but it is safe to say Chuck Jones won't be running [FirstEnergy] for much longer," DeVries told S&P Global Market Intelligence on July 22. "The problem for the [company's board of directors] is if they force a resignation right now it makes them look guilty, so they will have to word it carefully."

Analyst began to take a more positive view of the company's role in the scheme after Jones admitted the company provided about $15 million of the funding at issue but maintained the company "acted properly" in supporting the law.

"I've never made a payment directly to a lobbyist in my life nor asked any lobbyist to make a payment to anyone else on behalf of our company in my life," Jones said July 24 on the company's second-quarter earnings call. FirstEnergy's third-quarter earnings call is scheduled for Nov. 2.

In his Oct. 29 report, DeVries breaks down how CreditSights changed its view on FirstEnergy's involvement.

"We didn't think CEO [Charles] Jones would come out proclaiming his innocence and host a long Q&A with investors three days after the Householder affidavit was filed detailing numerous instances of wiretaps," DeVries said. "Who would take a chance on something like that? Evidently, Chuck Jones would and it didn't work out and now potentially opens the company up to even more lawsuits."

CreditSights, in a July 23 report, said it believed FirstEnergy's balance sheet "can support a $2 billion entirely debt funded penalty/fine/legal settlement" and still maintain the minimum requirement for investment-grade credit ratings, but expects the "ultimate fine and penalties to be closer to the $500 million range."

DeVries compared the situation to that faced by Exelon Corp. subsidiary Commonwealth Edison Co. for its role in a yearslong effort to improperly influence legislation through steering jobs and contracts to associates of a top Illinois lawmaker. A deferred prosecution agreement reached with federal investigators requires ComEd to pay a $200 million fine, continue to cooperate with the government's investigation and enhance its corporate compliance program.

"[U]ntil [FirstEnergy] presents evidence saying otherwise, that $200 million could be the floor [for] potential fines," DeVries wrote.

The Office of the Ohio Consumers' Counsel, along with Ohio Attorney General Dave Yost, have filed legal and regulatory challenges to H.B. 6, as well as FirstEnergy's "political and charitable spending."

"For some time I've been saying that utilities with their corporate interest have undue influence to the detriment of the Ohio public interest," Ohio Consumers' Counsel Bruce Weston said in an Oct. 29 written statement. "[The Oct. 29] announcements in the courtroom and the FirstEnergy boardroom are more confirmation of something rotten in our system that has to be purged, beginning with the repeal now of tainted House Bill 6 and continuing with other consumer protection reforms."

Guggenheim's Pourreza has cautioned that the investigation will take time to unravel.

"We are particularly concerned that as additional information comes to light and parties enter plea agreements, the scope of the investigation could expand to other utilities and stakeholders within the state," the analyst wrote in an Oct. 29 report.

American Electric Power Co. Inc. Chairman, President and CEO Nicholas Akins has promised increased transparency around the company's contributions to 501(c)(4) organizations while maintaining the Columbus, Ohio-headquartered utility did not make any contributions to Generation Now. The company said no one has been contacted as part of the federal investigation.