By Rory D. Sweeney

FirstEnergy CEO Charles Jones said Wednesday the company’s floundering FirstEnergy Solutions (FES) merchant generating arm is now under a death watch and that, in his “simple view of the future,” coal and nuclear generation will become extinct without market changes.

Jones told analysts on the company’s earnings call that “unless something is done to change the construct of these administrated markets, which have been administrated in a way to disadvantage coal and nuclear plants” and “unless the states step in to provide support, there will be no coal or nuclear plants left in these markets.”

During the call, Jones revealed the extent to which the company has cut ties with FES and that he expects the subsidiary will not survive the winter. He said FES has been operating independently since early last year and will no longer have access to its parent’s internal bank by the end of March, “and that will be the last tie that we have with that business.” (See FirstEnergy Selling Merchant Fleet Despite NOPR.)

“While I can’t speak for FES, I will be shocked if they go beyond March without some type of a [bankruptcy] filing,” he said.

‘Personally Disappointed’

Jones said it would be up to the subsidiaries that own generation — FES, Allegheny Energy Supply and Monongahela Power — to determine whether they will bid into PJM’s Base Residual Auction in May. He also touched on the U.S. Department of Energy’s Notice of Proposed Rulemaking and other efforts that could provide support for the company’s ailing nuclear and coal-fired resources.

“I’m personally disappointed that the endeavors haven’t resulted in a meaningful legislative or regulatory support, given the importance of these plants to grid resiliency, reliable and affordable power and the region’s economy,” he said.

The company is also “not planning to make another attempt at Pleasants,” he said, referring to FirstEnergy’s recently abandoned plan to transfer ownership of its 1,300-MW coal-fired plant from Allegheny to Mon Power, where the plant would have received a defined return based on regulatory review. He said Mon Power would meet any supply needs through PJM’s markets while the company determines how to address a capacity shortfall in its most recent integrated resource plan. Another IRP is due in two years, Jones said. (See FirstEnergy Shutting down Unsold Coal Plant.)

FirstEnergy reported a fourth-quarter GAAP loss of $5.62/share based on asset impairments and plant exit costs of $2.4 billion (3.38/share), which included reducing the carrying value of Pleasants, fully impairing nuclear assets and increasing nuclear asset retirement obligations, said Jim Pearson, the company’s new executive vice president of finance. The company also took a non-cash charge of $1.2 billion ($2.68/share) related to the Tax Cuts and Jobs Act.

K. Jon Taylor, the new president of FirstEnergy’s Ohio operations, said the tax law’s elimination of bonus depreciation would add about $400 million to the rate base, but that depreciation was already scaling down to 40% in 2018 and 30% in 2019.

Adjusted earnings were 71 cents/share for the quarter, driven by a 23 cents/share year-over-year increase from the company’s distribution segments. Jones said operating earnings for the company’s transmission and distribution segments increased 14% in 2017, or 25% if the distribution modernization rider (DMR) in Ohio is included. The company is looking for the Public Utility Commission of Ohio to approve a $450 million distribution platform modernization plan to better gird against blackouts and to prepare for “smart grid technologies.”

Wired Future

To pump up its transition to becoming a fully regulated “wires” company, FirstEnergy plans to invest $10 billion in its distribution and transmission infrastructure by 2022, starting with 2018 operating earnings guidance of $2.25 to $2.55 per diluted share, with a long-term growth-rate projection of 6 to 8% through 2021, Jones said. He said that each year between $1 billion to $1.2 billion of that investment will be targeted to transmission. That excludes the DMR in Ohio and is offset by the corporate segment.

Jones was quick to squelch any thoughts that the company is profiteering in its regulated business.

“There should be absolutely no concern in the market about us overearning in Pennsylvania. And if there is any hysteria out there, you all are smart enough to know that there are people that trade off with the hysteria,” he said in response to a question on several rate cases in the state.

The company last month announced the sale of $2.5 billion in equity to investment companies, which included the formation of a “restructuring working group” to advise on any potential restructuring at FES. The group includes three FirstEnergy executives — Pearson, Leila Vespoli and Gary Benz — along with John Wilder of Bluescape Energy Partners and Tony Horton of Energy Future Holdings. The group serves FirstEnergy’s interests, while FES is overseen by its own board of directors. Pearson is also in charge of an internal company redesign known as FE Tomorrow.

Jones also bristled at suggestions that the cash won’t be enough.

“No additional equity through 2021,” he said. “I can’t believe it’s only one month after doing $2.5 billion that we’re already getting that question again, but there will be none.”

Changes at the Top

FirstEnergy also announced several changes to its board of directors and executive suite before the call on Wednesday. Donald Misheff, who has been on the board since 2012, was elected chairman effective May 15 to replace George M. Smart, while Sandra Pianalto became a director. Smart and William T. Cottle, both 72, are retiring in May in accordance with the company’s mandatory retirement-age policy.

Within the company:

• Kevin T. Warvell became vice president, chief financial officer, treasurer and corporate secretary for FES. Previously, he was FES’ vice president of commercial operations, structuring and pricing and corporate secretary.
• Christine L. Walker became vice president of human resources for FirstEnergy Service subsidiary. Previously, she was the executive director of FirstEnergy’s talent management.
• Jason J. Lisowski became vice president, controller and chief accounting officer of FirstEnergy. Previously, he was the controller and treasurer for FES.
• Donald A. Moul became president of FES Generation and chief nuclear officer. Previously, he was president of FirstEnergy Generation.
• Charles D. Lasky became senior vice president of human resources and chief human resources officer for FirstEnergy Service. Previously, he was the senior vice president of human resources.
• Steven E. Strah became senior vice president and chief financial officer. Previously, he was a senior vice president and president of FirstEnergy Utilities.
• Sam Belcher became a senior vice president and president of FirstEnergy Utilities. Previously, he was president and chief nuclear officer for FirstEnergy Nuclear Operating Co.

Pearson was the company’s executive vice president and chief financial officer. Taylor was a vice president, controller and chief accounting officer.