FirstEnergy settlement with bondholders of bankrupt subsidiary hinges on asset sale

Ohio-based FirstEnergy Corp. reached a settlement with holders of pollution control notes issued by its bankrupt subsidiary FirstEnergy Solutions that hinges on the outcome of an asset sale.

First Energy Solutions Corp., and its affiliates filed for Chapter 11 in Akron, Ohio, on March 31. Together the entities operate two coal-fired plants, one dual fuel gas/oil plant, one pet-coke fired plant and three nuclear power plants in the competitive, or non-regulated, power-generation industry.

The agreement includes a combination of cash payments and tax notes designed to deliver $628 million in value to creditors, according to a securities filing. Creditors, who hold $1.8 billion of pollution control notes, agreed to work hand in hand to get the assets sold or recapitalized to boost the amount recovered.

Signage at the FirstEnergy Corp. Bruce Mansfield coal-fired power plant in Shippingport, Pennsylvania on Dec. 6, 2017. FirstEnergy Solutions, its subsidiaries and FirstEnergy Nuclear Operating Company filed for Chapter 11 bankruptcy on March 31, 2018.
Signage is displayed at the FirstEnergy Corp. Bruce Mansfield coal-fired power plant in Shippingport, Pennsylvania, U.S., on Wednesday, Dec. 6, 2017. Across America, few places are as dominated by big, centralized power plants as Shippingport. It was here, in the 1950s, that the federal government teamed up with private industry to build the country's first nuclear power plant. Photographer: Justin Merriman/Bloomberg

There is no cash payment. First Energy and FES agreed to split any proceeds of the sale above 60 cents on the dollar with the unsecured bond holders. The senior bondholders will have first dibs on the sale proceeds whenever it occurs.

The agreement represents a "significant step toward FES, its related entities, and FENOC ultimately emerging from bankruptcy,” FirstEnergy said in a press release on Monday.

FES and its subsidiaries have $516 million of pollution control notes maturing between April and Dec. 2018 and $1.3 billion of pollution control notes maturing between 2019 and 2021. Roughly $612 million of the debt is in secured notes, with the rest in unsecured debt issued through Pennsylvania’s Beaver County Industrial Development Authority, the Ohio State Air Quality Development Authority and the Ohio Water Development Authority.

The private power plant operator sold the debt to fund air and water pollution control facilities and sewage and solid waste facilities at its power generation plants. Under Internal Revenue Service rules, bonds for such pollution control projects qualify for tax exemption.

“I am surprised at how quickly the Ad Hoc group of bondholders and FES came to an agreement," said Dean Myerow, Portfolio Manager at Las Olas Wealth Management of NatAlliance Securities LLC. "This bodes well for creditors since complex cases like this have the potential to be litigated for years.”

Under the settlement First Energy and FES have an agreement in principle to share 50/50 in any enterprise recovery value above 60 cents on the dollar for up to three years following the Effective Date of the Plan.

Myerow said that the settlement agreement between FE and FES creditors proposes a distribution based on tax savings from the settlement from the proposed Tax Sharing Agreement. FE will waive the 2017 overpayment that is due from FES/FENOC and restore the 2018 setoff amount. “The settlement appears to offer a cash payment of $225 million less setoffs that would be distributed to unsecured bond holders,” Myerow said.

The tentative agreement, which still must be approved by the bankruptcy court, commits FirstEnergy to providing assistance to FES and to the FirstEnergy Nuclear Operating Co.

It also bodes well for First Energy Solutions employees. “My reading of the Term Sheet suggests that FE will pay existing pre-petition claims for pensions, deferred compensation, life insurance and long term equity incentives," Myerow said. "This is a huge win for employees who will not be facing lengthy litigation.”

If approved, the settlement would release FirstEnergy from all claims and liabilities in the Chapter 11 proceeding.

FirstEnergy said the two creditor groups that signed off on terms would seek to get approval from the official committee of the unsecured creditors, as well as any other key creditors by June 15.

FirstEnergy Solutions, its subsididaries and FENOC on March 31 filed for Chapter 11 bankruptcy protection. FirstEnergy Corp. distribution, transmission, regulated generation and Allegheny Energy Supply subsidiaries were not part of that filing.

Prior to filing, the company had already announced plans to shut the three nuclear plants and has closed several coal-fired generators since 2012. On March 29 it filed an application with U.S. Secretary of Energy Rick Perry seeking federal intervention to save the company’s unregulated coal and nuclear plants. The proposed intervention would be a "grid emergency" that would force the electric grid operator to guarantee profit for the firm's coal and nuclear generators, according to Bloomberg News.

FirstEnergy CEO Chuck Jones said during an earnings call on Monday with analysts and investors that the agreement would mean a clean break from the cash-strapped subsidiary, though he plans to continue to personally lobby to keep the unit's coal and nuclear plants running.

Jones also intends to continue lobbying "regulatory or legislative solutions, including FES's application to the U.S. Department of Energy for an emergency order under the Federal Power Act" for financial support of the old nuclear coal-fired power plants. Under the agreement with creditors, if the amount of any coal or nuclear subsidies exceeds a certain threshold, "then, yes, we would share some of that. But that's not why we're doing it," Jones said.

S&P Global Ratings upgraded its outlook for FirstEnergy to "positive" on the basis of the agreement and affirmed the parent’s BBB-minus rating. The revised outlook means there's potential for an upgrade to the utility's ratings over the next 12 months, S&P said. Moody’s Investors Service rates the utility Baa3, outlook stable.

On April 2, S&P lowered its issuer credit rating on FES to D from CCC-minus and lowered all issue-level ratings to D. Moody’s withdrew the rating on FES.

Myerow said that on the news of the agreement, the unsecured muni bonds jumped in value on Monday morning “from trading in the high 20s to the mid-40s, overnight.” The senior bonds were trading back in the high 80s-low 90s based on their seniority.

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