FirstEnergy’s positive third-quarter financial results were overshadowed Monday by questions over the firing of CEO Charles Jones and the ongoing federal investigation into the company’s involvement in the $61 million bribery scandal over the passage of Ohio House Bill 6.
Christopher Pappas, FirstEnergy board member and new executive director, said the Department of Justice investigation into the bribery scheme has triggered several shareholder and customer lawsuits, and the company is responding to a U.S. Securities and Exchange Commission subpoena received on Sept. 2. Pappas said FirstEnergy is cooperating with both agencies.
In July, federal prosecutors alleged FirstEnergy spent $61 million in bribes, “dark money” campaign contributions and advertising to elect former Ohio House Speaker Larry Householder (R) and his allies in return for their support of HB6, which provided $1.5 billion in subsidies for the utility’s struggling nuclear plants. (See Feds: FE Paid $61 M in Bribes to Win Nuke Subsidy)
On Oct. 29, following an internal investigation related to “government investigations,” the company said it had fired Jones and two other officials, Dennis Chack, senior vice president of product development, marketing and branding, and Michael Dowling, senior vice president of external affairs, for violating its code of conduct. The firings came on the same day as the filing of guilty pleas of former FirstEnergy Solutions (FES) lobbyist Juan Cespedes and political strategist Jeffrey Longstreth, who admitted to participating in a racketeering conspiracy.
Steven Strah, president of FirstEnergy, was later appointed as acting CEO, while Pappas was named executive director. (See FirstEnergy Fires Jones over Bribe Probe.)
Pappas was asked Monday if other FirstEnergy officers or employees were in violation of the company’s policies or code of conduct. Pappas said he couldn’t comment as an investigation is still being conducted. “The investigation is still ongoing, and it would be premature to make any comments on that until we get to a more conclusive state,” Pappas said.
SEC Filing
While FirstEnergy officials were reluctant to answer further questions about the inquiry, an SEC filing by the company on Monday gave hints as to some of the behind-the-scene actions by investigators.
In the filing, FirstEnergy said it has received requests for information related to the government investigations, and those investigations and related litigation “could have a material adverse effect on our reputation, business, financial condition, results of operations, liquidity or cash flows.”
FirstEnergy confirmed that on July 21, it received subpoenas for records from the U.S. Attorney’s Office for the Southern District of Ohio requesting information related to HB6, Householder and other individuals associated with the former speaker. On Aug. 10, the SEC issued an order directing an investigation of possible securities laws violations by FirstEnergy, and on Sept. 1 it issued subpoenas to the company and “certain of its officers.”
The SEC filing said investigations and related litigation could divert the focus of FirstEnergy’s management and result in “substantial investigation expenses” and the commitment of corporate resources.
“We are unable to predict the outcome, duration, scope, result or related costs of the investigations and related litigation, or adverse impacts on federal or state regulatory matters, including with respect to rates, and, therefore, any of these risks could impact us significantly beyond expectations,” the SEC filing said. “Moreover, we are unable to predict the potential for any additional investigations, litigation or regulatory actions, any of which could exacerbate these risks or expose us to potential criminal or civil liabilities, sanctions or other remedial measures, and could have a material adverse effect on our reputation, business, financial condition, results of operations, liquidity or cash flows.”
Earnings and Company Moves
FirstEnergy reported earnings of $454 million ($0.84/share) on revenue of $3 billion, compared to $391 million ($0.73/share) on revenue of $2.9 billion for the same period last year. The results beat FirstEnergy’s internal expectations by a cent, company officials said, and it reaffirmed its outlook for the remainder of its fiscal year as well as long-term growth projections.
Shares of FirstEnergy were up 19 cents, or 0.64%, to $30.12 as of closing on Tuesday.
FirstEnergy also announced it filed an application with FERC last week to move transmission assets in the Allegheny Power System zone to forward-looking formula rates. The move includes transmission assets in West Penn Power’s territory in Pennsylvania, Mon Power in West Virginia and Potomac Edison in West Virginia, Maryland and Virginia. FirstEnergy requested an effective date of Jan. 1.
It also created a new stand-alone transmission company, the Keystone Appalachian Transmission Co., to allow for new construction in the same footprint. FirstEnergy said last week it filed to establish a forward-looking formula transmission rate for the new company, and it plans on transferring certain transmission assets from West Penn Power and Potomac Edison by the start of 2022.
Company officials said they are currently taking steps to improve its liquidity and have been reaching out to its key stakeholders, including ratings agencies, banks, regulators, legislators and union leadership in the aftermath of the investigation.
The board has formed a new subcommittee of its audit committee to assess and implement potential changes to its compliance program. Leslie Turner, a FirstEnergy board member and former senior vice president of The Hershey Co., will lead the effort. Company officials said the new subcommittee will work with management, create an internal audit and engage outside expertise for help and best practices.
“I agree that the actions taken by our board of directors last week were absolutely necessary and are an additional step towards addressing this matter,” Strah said. “The management team is committed to working with the board to assess and implement potential changes as appropriate with the company’s compliance program. We take this as a serious and important matter, and we will begin to address this immediately.”