FirstEnergy officials said Friday they expect to sell minority interests in their distribution or transmission assets to raise capital following fallout from the Ohio House Bill 6 scandal.

News of FirstEnergy’s (NYSE:FE) deferred prosecution agreement with the federal government and its $230 million fine dominated the company’s second-quarter earnings call Friday as its CEO vowed to raise the company’s ethics.

CEO Steven E. Strah said the conduct that led to the action by the Department of Justice was “wrong and unacceptable,” and that the board and management team have done “extensive work” to regain trust of customers and are “committed to make the necessary changes to move on from this.”

Federal attorneys on Thursday filed a 49-page deferred prosecution agreement against FirstEnergy in U.S. District Court in Cincinnati, charging the company with conspiracy to commit honest services fraud. (See DOJ Orders $230 Million Fine for FirstEnergy.)

In the agreement, FirstEnergy acknowledged to paying $61 million in bribes and “dark money” campaign contributions and advertising to elect Larry Householder as speaker of the Ohio House of Representatives and help his allies, who in turn helped pass $1.5 billion in subsidies in 2019 for the company’s struggling nuclear plants.

“We will continue to cooperate fully with the ongoing investigations, audits and related matters as we work to resolve these issues and rebuild trust with our employees, customers, regulators and investors,” Strah said. “We are intently focused on fostering a strong culture of compliance and ethics and assuring that we have robust processes in place designed to ensure that nothing like this happens again.”

Equity Needs

FE’s second quarter 10-Q filing with the Securities and Exchange Commission said the company “believes that it is probable that it will incur a loss” over the resolution of an SEC investigation over possible security law violations from the scandal although it has not set aside a contingency and cannot estimate the size of the loss. The report also mentions more than a half-dozen class action lawsuits by shareholders accusing company executives and the Board of Directors of breaches of fiduciary duty.

CFO Jon Taylor declined to respond to a stock analyst’s question on whether the company was considering the sale of its MonPower or Jersey Central Power & Light units, but he said the company is considering “a minority sale of distribution and/or transmission assets, which would raise substantial proceeds and eliminate all of our expected non-SIP [stock investment plan] equity needs.”

“With respect to the different assets, I’m not going to get into specifics,” Taylor added. “We are getting more and more comfortable with a minority interest sale in one of our assets, and we’re fairly confident that that’s the right path forward. We think we can do this in a way that limits dilution to shareholders but can raise a significant amount of capital.”

Strah said he “would be very pleased to resolve the Ohio issues by year end, for sure, but I am determined to do it in a way in which it truly is collaborative. So, we are not going to be in a rush to do something that’s going to upend the process unnecessarily, but my true hope is that everybody will come to the table with progress and openness on their minds.”

Ethics Steps

Strah also said FE will remain engaged in the political “arena,” but that it would “do that in a much more limited basis.”

He pointed out several steps FirstEnergy has already taken. In May, the company held its first compliance town hall with employees to discuss the “importance of building a culture of trust” through ethics, integrity and compliance of all its workers.

Following the town hall, Strah said, FirstEnergy’s management team responded to employee questions and concerns to continue dialogue. He said another town hall meeting with employees is planned to be held this week to introduce the company’s updated mission statement while “reinforcing the role of uncompromising integrity as the cornerstone of FirstEnergy’s identity and business strategies.”

Strah highlighted two new hires: Michael Montaque joined the company earlier this month as vice president of internal audit, and Soubhagya Parija, the former risk manager for the New York Power Authority, was named vice president and chief risk officer effective Aug. 16.

“Our leadership team is committed to modeling the behaviors and the humility necessary to restore trust with our stakeholders,” Strah said. “We look forward to continuing this work and achieving the milestones that will mark our progress.”

John Somerhalder, vice chairman of the FirstEnergy Board of Directors, spoke about the company’s updated internal code of business conduct, called The Power of Integrity, saying the updates included the importance of reporting ethical violations and policies around corporate lobbying efforts.

“While the transformation of our culture and our steps to restore trust with all stakeholders will be long-term endeavors, this team has started building a stronger company built around a foundation of ethics, honesty and accountability,” said Somerhalder, who joined the board earlier this year.

Earnings

Taylor reported second-quarter earnings of $58 million ($0.11/share), compared to 2020’s second-quarter earnings of $309 million ($0.57/share). Taylor said the second-quarter results include the $230 million DOJ fine.

The company generated revenues of $2.6 billion in the second quarter, which missed the Zacks consensus estimate of $2.69 billion by 2.7%. For the third quarter of 2021, Taylor said, FirstEnergy is providing a GAAP and a non-GAAP operating forecast range of $380 million ($0.70/share) to $435 million ($0.80/share).

Taylor said second-quarter operating results benefited from higher revenues related to capital investment programs in Ohio and Pennsylvania, the implementation of the base distribution rate increase in New Jersey and lower expenses. He said those factors were offset by the lower distribution revenues in Ohio and higher interest expense compared to the second quarter of 2020.

Total operating expenses in the quarter under review came in at $2.3 billion, up 15.1% from $2 billion in 2020.

Residential sales decreased 3.3% on a year-over-year basis, Taylor said, while commercial deliveries increased 9.8% and industrial sales improved 11.4% year over year. Total distribution deliveries climbed 5.3% from 2020.

“We think more permanent work from home initiatives could impact our longer-term load forecast, and we will be watching closely to see if the structural shift in our residential customer class continues,” Taylor said.

FirstEnergy shares rose from $39 to $39.15 Thursday after the deferred prosecution agreement was announced, then closed at $38.47 Friday after earnings were announced.