FirstEnergy Solutions says it's on track for 2019 bankruptcy exit
Ohio-based FirstEnergy Solutions says it remains on track to exit Chapter 11 this year despite obstacles that have delayed creditor and court approval of a restructuring plan that asks unsecured bondholders to take a big haircut.
Bondholders have a May 16 deadline to submit objections to the company’s restructuring plan, the latest in a series filed since the company filed for Chapter 11 on March 31, 2018 in the U.S. Bankruptcy Court for the Northern District of Ohio.
The company has roughly $1.5 billion of unsecured municipal bond debt and roughly $690 million in secured muni 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 tax-exempt debt to fund air and water pollution control facilities and sewage and solid waste facilities at its power generation plants.
Secured bondholder claims are expected to be fully compensated under the company’s reorganization plan while unsecured claim recovery rates would be between 25.5% and 31.4%, according to the latest plan filed by FES on April 18. The company’s impaired creditors may vote on the plan. Creditors with unsecured claims will have a choice between receiving cash or newly issued stock in the reorganized company.
“Sometimes it is better to have resolution than to drag the process out longer,” said bankruptcy expert James Spiotto, a managing director at Chapman Strategic Advisors LLC in Chicago.
“Many times while [a bondholder] may think they have a good argument for getting more it comes down to ill it be deleterious to utility operations and if you stay in the process can you really do any better?” Spiotto said.
“From the bondholder's perspective when you’re getting notes back based on revenue, which I assume they are putting all this back into new rate base, so that there will be provisions in that base to make payments, you don’t want to have a surprise because a surprise could alter the revenues that should be going to you,” Spiotto said. “Surprise being a maintenance problem, cleanup problems or a liability coming from operation problem.”
Spiotto said that those creditors opting for the stock option will also want to make sure there aren’t any surprises.
FES was forced to revise its plan after an April 4 ruling by U.S. Bankruptcy Judge Alan Koschik, who rejected the third version of its bankruptcy reorganization plan for FirstEnergy Solutions based on its including "non-consensual third-party releases” that would have removed any liabilities from the parent company.
The new plan filed in the Ohio court on April 23 now makes FirstEnergy liable for any environmental cleanup costs tied to the decommissioning of four nuclear plants. Without the ruling, FirstEnergy could have been relieved of liabilities for shortfalls in trust funds that are to be used to decommission the plants in Ohio and Pennsylvania.
The development doesn’t really change anything for bondholders, according to Moody’s Investors Service analyst Jairo Chung.
“Waiving third party release was nice to have,” said Chung. “If you were to look at other independent power producers' bankruptcies that we’ve seen in past, they did not have this feature that allowed the parent to not be liable for any potential future cost.”
FirstEnergy Solutions spokesman Tom Becker said the filing of an amended plan shouldn’t knock the company’s timeline off track and he described the agreement with FirstEnergy to eliminate non-consensual third-party releases as providing a clear path forward to exit Chapter 11 this year.
"This change does not, in our assessment and experience, increase liabilities or obligations to our company," FirstEnergy president and chief executive officer Charles E. Jones said in a press release. It serves to bring finality to FirstEnergy's involvement with these legacy assets, he said.
Dick Munson, a director for the Environmental Defense Fund, a nonprofit environmental advocacy group, says that FirstEnergy is saying that under the revamped agreement it is going to accept responsibility for future environmental costs “but they are also saying there aren’t going to be any, so it doesn’t really impact them.”
Munson said it is likely that creditors and bondholders will look at the revised plan favorably. “But it should be taken with grain of salt because FirstEnergy is claiming that they will assume all liabilities and that means they have a parent company ready to assume these costs even though I think they are outrageously taking the assumption that they are zero,” Munson said.
As the company is working to exit Chapter 11, pending bills in Ohio and Pennsylvania would provide subsidies to keep the FirstEnergy Solutions nuclear plants open. FirstEnergy Solutions has said it plans to shut down the Ohio nuclear plants in the coming years if the state doesn't force ratepayers to subsidize them.
The bill in Ohio would charge ratepayers a monthly surcharge of $2.50 for residential customers, $20 for commercial customers, $250 for industrial ratepayers and $2,500 for very large power users.
It would raise roughly $300 million per year, a large share of which would keep two FirstEnergy Solutions reactors open. Both power plants are losing money. Gov. Mike DeWine has said that nuclear energy needs to play a role in the state’s energy policy.
Munson said that if successful the subsidies mean that FirstEnergy Solutions would continue to operate those units. “That means there is an extended period of time where they will be contributing to a decommissioning fund and therefore not face an immediate possible charge for cleaning them up,” Munson said.
The Chapter 11 filing included FirstEnergy Solutions, its subsidiaries, and FirstEnergy Nuclear Operating Co.
Parent FirstEnergy announced in November 2016 that it planned to exit the competitive generation business. The entities that filed for bankruptcy operate two coal-fired plants, one dual fuel gas/oil plant, one pet-coke fired plant and three nuclear power plants in the competitive, non-regulated, power-generation industry.
FirstEnergy itself, which owns 10 regulated electric utilities in five states, is not part of the bankruptcy.
The outstanding debt issued by FirstEnergy Solutions is the responsibility of FirstEnergy Solutions alone. FirstEnergy Corp. does not back the debt and the conduit issuers of the municipal bonds do not guarantee the debt.