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FirstEnergy's latest effort to save nukes expected, but action unlikely

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FirstEnergy's latest effort to save nukes expected, but action unlikely

Wall Street has shown little reaction following an announcement by FirstEnergy Corp. competitive subsidiary FirstEnergy Solutions Corp. that it will shut three nuclear plants in Ohio and Pennsylvania within the next three years absent legislative action and policy solutions.

FirstEnergy Solutions, or FES, on March 28 said it notified PJM Interconnection of its plan to shut down the 908-MW Davis-Besse and 1,268-MW Perry nuclear plants in Ohio and the 1,872-MW Beaver Valley nuclear plant in Pennsylvania. Davis-Besse would be retired in 2020, and the Perry and Beaver Valley plants would be deactivated in 2021, subject to review by PJM.

FES followed the announcement with a request for the U.S. Department of Energy to issue an emergency order that would require PJM to compensate at-risk coal and nuclear plants "for the full benefits they provide to energy markets and the public at large."

Guggenheim Securities LLC analyst Shahriar Pourreza said in a March 29 interview that FirstEnergy's nuclear announcement is "net-net, an incremental positive" in either direction. "If they shut the plants down, it's somewhat cash flow positive. And if they don't shut the plants down and get legislation, well that's upside to our numbers too."

FirstEnergy stock opened March 26 at $33.78 and closed at $34.01 on March 29.

"From a FirstEnergy perspective, we believe an expedited passage of legislation or sale of units to third parties would aid the upcoming FES bankruptcy process," RBC Capital Markets LLC analyst Shelby Tucker wrote in a March 28 report. "On the other side, we believe the closure of these plants could potentially create transmission investment opportunities for [FirstEnergy]."

Pourreza added that he does not anticipate any policy changes that would rescue FirstEnergy's nuclear plants. "I just think the timing doesn't really work in their favor," he said.

The analyst also said he does not view the decision on the merchant nuclear plants as connected to a potential bankruptcy filing by FES.

"I think either way, FirstEnergy Solutions is going to file for bankruptcy. Whether it's a prearranged deal with the creditors on board or not remains to be seen. That's what everyone is sort of waiting for," Pourreza said. "But no, I don't think the viability of these assets is going to impact FirstEnergy Solutions because they still lose access to whatever money pool they had access to and they do have a maturity coming up. That can't get rectified easily."

An independent board of directors at FES, which has a $100 million bond maturity due in April and another $400 million maturity due this year, is determining whether the competitive subsidiary will file for Chapter 11 bankruptcy protection.

"It would be very difficult for [the FES board] to make a decision to make that principal payment because their cash flow forecast, based on market conditions, indicates that they are really not a viable or solvent entity," FirstEnergy Executive Vice President and CFO James Pearson said in a January phone interview.

"While I can't speak for FES, I will be shocked if they go beyond the end of March without some type of a filing," FirstEnergy President and CEO Charles Jones Jr. told analysts and investors in late February.

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As investors await an FES filing, utility analysts also are keeping a close eye on the political environment in South Carolina.

South Carolina lawmakers have reportedly pumped the brakes on a vote that would implement an immediate rate reduction for South Carolina Electric & Gas Co. ratepayers.

The South Carolina Senate was set to finalize its attempt to order a 13% interim reduction in rates but has decided to delay a vote on a new amendment to S.B. 954 until at least April 10.

Such a move could doom the sale of the utility and parent SCANA Corp. to Dominion Energy Inc.

Dominion's offer includes $1.3 billion of cash payments to all SCE&G electric customers within 90 days after closing and an additional rate reduction of about 7% to offset previous and future costs tied to the abandoned V.C. Summer nuclear plant expansion.

Lawmakers appear to be waiting for Dominion to sweeten its proposal, but the Richmond, Va.-headquartered energy giant has not indicated such a move.

"It is clear our proposal is [the] best long-term solution for SCE&G customers and for South Carolina," Dominion Energy spokesman Chet Wade said in an email.

Separately, Dominion Energy on March 27 announced a plan to shore up its balance sheet amid a downturn in Dominion Energy Midstream Partners LP's stock.

The Federal Energy Regulatory Commission's decision to no longer allow master limited partnerships to include federal income taxes in their cost-of-service rates has put pressure on the sector.

"The reaction of MLP equity capital markets to the FERC policy revision may have a materially negative impact on the amount and price at which [Dominion Energy Midstream] can raise public equity," Dominion Energy Chairman, President and CEO Thomas Farrell said in a news release.

To counteract the impact of stock weakness and boost the parent company's near-term credit profile, Dominion Energy said it will pursue debt financing of its Cove Point liquefied natural gas facility and the sale of noncore assets. Dominion Energy also announced the public offering of up to 23 million shares of its common stock at $67.85 per share for a total issuance of approximately $1.56 billion of equity.

"We view the share issuance positively as it addresses concerns associated with the need for potential equity given the weakened outlook at Dominion Energy Midstream Partners," Hilliard Lyons Equity Research analyst David Burks wrote in a March 29 research report.

The firm also said it is "encouraged" by the debt financing of Cove Point and potential sale of noncore assets, which could include its 50% stake in Blue Racer Midstream LLC, in order to reduce parent-level debt.

"Along with reducing some near-term uncertainty, these moves allow the company to develop a long-term strategy in how to deal with the revised tax structure at Dominion Energy Midstream Partners," Burks wrote.