By Rory D. Sweeney

FirstEnergy announced mixed first-quarter earnings Monday, along with a potential path to exit the bankruptcy of its merchant subsidiaries.

The “agreement in principle” with two groups of “key” creditors that represent most of the outstanding debts for FirstEnergy Solutions (FES) includes $225 million in cash and a tax note of $628 million due before 2020, according to a company financial disclosure filed with the U.S. Securities and Exchange Commission.

Additionally, a $787 million unsecured claim would be allowed for creditors of the company’s Bruce Mansfield coal-fired plant in Pennsylvania, where a fire damaged two of the facility’s three coal-fired units earlier this year and two workers died from exposure to hydrogen sulfide gas in August, according to company filings. Four other employees were injured. The claim would be allowed against FES and its subsidiaries, FirstEnergy Generation and FirstEnergy Nuclear Generation.

Although FirstEnergy’s Allegheny Energy Supply (AE Supply) subsidiary hasn’t filed for bankruptcy, the agreement would also transfer to creditors its ownership of the Pleasants coal-fired plant, for which it hasn’t found a buyer. (See FirstEnergy Shutting down Unsold Coal Plant.) AE Supply sold off its natural gas and pumped hydro generation assets last year. (See FirstEnergy Selling Merchant Fleet Despite NOPR.)

Earnings

The agreement came as the company also reported unadjusted first-quarter earnings of $1.2 billion ($2.54/diluted share), which improved from $205 million ($0.46/share) during the first quarter last year. Operating earnings of 67 cents/share improved from 52 cents during the same period in 2017 but missed expectations by 1 cent. Revenue increased to approximately $3 billion compared with $2.9 billion a year ago but remained several hundred million dollars below analysts’ expectations.

The company attributed the improved performance to shedding its beleaguered merchant generation fleet.

“Today, we are pleased to report strong earnings that represent FirstEnergy as a fully regulated company,” CEO Charles E. Jones said.

The company raised its forecast range for unadjusted earnings for the year to $3.61 to $3.91/share, but it announced a gloomier forecast for next quarter. Unadjusted earnings are expected to drop to no more than 4 cents/share and could fall to a loss of 6 cents. Operating earnings are expected in the range of 47 to 57 cents/share.

Agreement Conditions

Company executives clarified several of the agreement’s points during a conference call on Monday to discuss the quarterly earnings with financial analysts.

One of the agreement’s conditions allows that if more than 60% of unsecured claims are recovered, FirstEnergy would receive 50% of any additional recovery. Jones acknowledged that such a situation would include any federal bailouts, such as those the company has requested through the Department of Energy, but emphasized that his interest is in keeping the plants open for the well-being of the communities in which they’re operating.

“We’re highly motivated to get support for those generating assets because it would be a mistake for our country for them to close,” he said. “I’m going to keep fighting for support for those plants, because it’s the right thing to do. If it gets to the point where it exceeds the threshold that we’ve got in this agreement with creditors, then, yes, we would share some of that, but that’s not why we’re doing it.”

In exchange for assistance from FirstEnergy during restructuring, the settlement would release the parent company from all claims, including decommissioning obligations for any of the nuclear plants if they are closed as the company has announced, Jones confirmed. (See FES Seeks Bankruptcy, DOE Emergency Order.)

FirstEnergy would waive some intercompany claims and maintain all previously announced guarantees, including pension obligations for FES employees. Creditors agreed to “use their best efforts” to get remaining creditors to join the settlement by June 15.

The agreement must receive sign-off from a federal bankruptcy court in Ohio, along with the boards of directors for FirstEnergy and its subsidiaries, including FirstEnergy Nuclear Operating Co. (FENOC).

FES and FENOC voluntarily filed for Chapter 11 bankruptcy on March 31. FES is FirstEnergy’s merchant generation and retail marketing subsidiary, while FENOC operates FES’ three nuclear plants. The decision, while expected for some time, is nonetheless creating ripples of uncertainty throughout the industry. (See FES Bankruptcy Creating Additional Uncertainty.)