More Losses for FirstEnergy; FES Seeks Policy Support Amid Bankruptcy

Despite significant milestones to become a fully regulated utility, FirstEnergy Corp. on October 25 reported third-quarter losses of $512 million on revenue of $3.1 billion. The results largely reflect charges related to the court-approved settlement in the bankruptcy cases of its competitive subsidiaries FirstEnergy Solutions (FES) and FirstEnergy Nuclear Operating Co. (FENOC), the company said.

Financially crippled by market volatility, FES sought bankruptcy protection on March 31, days after the company notified PJM Interconnection on March 28 it would close four uneconomic nuclear units-a total of 4 GW-in the regional transmission organization's footprint. As it did so, it also took the unprecedented-and highly controversial-step of entreating the Department of Energy (DOE) to save its beleaguered coal and nuclear plants through a Federal Power Act Section 202c emergency order. A recent filing with a federal bankruptcy court shows that while FES has made significant strides in salvaging its business, it continues to seek policy support for its generating plants.

FirstEnergy Corp. Shifts Direction

Charles E. Jones, FirstEnergy president and CEO, in an earnings conference call on October 26 told analysts that approval of the "definitive" settlement agreement with FES and its creditors by the U.S. Bankruptcy Court in the Northern District of Ohio in Akron on September 25 is a "very positive development." It is "perhaps the most important milestone" in FirstEnergy Corp.'s exit from competitive generation, which the company announced in November 2016, he said.

Parties to the September-approved settlement include FirstEnergy, FES, the Ad Hoc Noteholders Group, the Bruce Mansfield Certificate Holders Group, and the Unsecured Creditors Committee. Under the agreement, FirstEnergy will make a settlement payment of $225 million to FES (which has a separate board of directors) and issue $629 million in notes that would mature in December 2022.

The entities also agreed that FES will take on ownership of the two-unit 1,300-MW Pleasants Power Station from FirstEnergy subsidiary Allegheny Energy Supply. As POWER reported last week, FirstEnergy plans to keep the plant in West Virginia open until June 2022, after earlier announcing the plant would close in January of next year.

FirstEnergy also agreed to continue providing back office "shared services" for FES, and it will credit FES $112.5 million for those services through December 2018. FirstEnergy calls its program to align its cost structure and shared services workforce the "FE Tomorrow initiative."

However, Jones noted the initiative forced FirstEnergy to eliminate 960 positions, which included 500 employees who accepted its voluntary enhanced retirement package, and 230 open positions. The end result, Jones said, should create a "flatter, leaner management structure by reducing layers and increasing spans of control."

FirstEnergy Corp. said it has also identified opportunities to eliminate $300 million of cost associated with its competitive operations, Jones said. "In addition, we expect to fully offset the $30 million of depreciation, associated with common systems shared with FES. We also identified an additional $20 million of O&M and interest, and $35 million in capital reductions for total incremental cash savings of $85 million," he said. "The expected savings include reductions in labor costs and less reliance on contractor work and will be reflected in the 2019 earnings guidance, we will provide at [Edison Electric Institute] next month."

Jones expressed optimism for FirstEnergy's distribution services and retail earnings, noting the company added 35,000 new residential customers between the third quarters of 2017 and 2018-marking nine quarters in which the company has seen growth in that sector.

He also noted FirstEnergy Corp. is now a fully regulated transmission and distribution company in Ohio, having shed its entire generation portfolio in that state. Responding to an analyst question about how changes in Ohio's renewables goals could affect the company, he said, "Should there be additional closures in Ohio, there's a process within PJM to review those closures and identify any changes in the transmission networking capability to handle those."

He added: "At this point in time, under Ohio law, regulatory utilities aren't allowed to invest in generation.So I'm not spending any time worrying about generation in Ohio at this point in time. We're worried about the T&D infrastructure and serving our customers the right way there."

FES Trudges Through Bankruptcy Proceedings

FES, meanwhile, is mired in the early stages of negotiating a plan of reorganization, a process it says will require addressing "a great number of significant issues and complex workstreams" with its creditors.

In its latest bankruptcy court filing on October 23, the company noted its Chapter 11 cases constitute one of the "largest and most complex operating company Chapter 11 filings ever in the Northern District of Ohio," which is why it urged the court to extend the period to file a Chapter 11 plan by 120 days, through March 2019. The company suggested it could then solicit votes through May 2019.

However, FES also noted significant achievements over the past three months. Along with obtaining the settlement agreement with its parent company, FES said it is working to stabilize and maintain its operations, as well as to maximize liquidity and improve cash flow. In its latest filings, FES said its efforts have already helped increased its liquidity by about $125 million.

These efforts include working to sell its retail customer business, which continues to service about 906,000 retail customers in 22 utility service territories across Illinois, Maryland, Michigan, Ohio, Pennsylvania, and New Jersey, despite the bankruptcy cases.

FES this July also launched the sale of its 546-MW natural gas- and oil-fired West Lorain Plant in Ohio. The company received 13 initial bids when the first phase ended in September. A select number of those bidders have been invited to conduct further due diligence, before the second round of bids are due in November.

At the same time, FES is seeking court approval to reject certain long-term power purchase agreements (PPAs). Efforts also continue to get the court's green light to reject various "financially burdensome" executory contracts and leases and enter into others that are more "financially beneficial."

The reorganization plan FES is formulating in collaboration with the official committee of unsecured creditors has also made "significant progress," it reported. "The Debtors continue to engage with, and foster productive discussions with and amongst, the Creditor Groups in addition to producing information and analyses necessary to facilitate plan negotiations," the filing says.

Since the court approved the settlement agreement, FES and its creditors have expanded negotiations to include other creditor representatives, including an ad hoc group of FES unsecured creditors that hold or have acquired PPA rejection claims.

FES Looks to States, DOE, FERC for Power Plant Bolsters

Finally, and as significantly, FES noted it is working to develop policy solutions to support its generating plants.

As announced in March, FES is making headway in the permanent closure of four nuclear units in PJM's footprint: the 908-MW Davis-Besse Nuclear Power Station in Oak Harbor, Ohio, by 2020; the twin-unit 1,872-MW Beaver Valley Power Station in Shippingport, Pennsylvania, in 2021; and the 1,268-MW Perry Nuclear Power Plant in Perry, Ohio, in 2021. On August 30, FES also notified PJM that it would deactivate four fossil-fuel generating plants in 2021 and 2022.

But it apparently isn't giving up without a fight. Days before it sought bankruptcy protection, FES on March 29 filed an application for an emergency order with the DOE under Section 202c of the Federal Power Act, a clause that gives the energy secretary extraordinary authority to order temporary connections of facilities and generation, delivery, interchange, or transmission of power to mitigate a power emergency, such as a shortage. Specifically, FES asked the DOE to order PJM to immediately begin negotiations to secure the long-term capacity of certain nuclear and coal-fired plants in the region and to compensate their owners "for the full benefits they provide to energy markets and the public at large, including fuel security and diversity."

In its latest court filing, FES said it has worked "to develop and implement outreach to legislative and regulatory officials" in Ohio and Pennsylvania to explore their support for continued operation of FES's nuclear power plants. FES also said it is actively engaged in monitoring efforts by the DOE to develop potential support for baseload coal and nuclear plants, and related congressional oversight of such efforts. FES has also monitored and participated in regulatory proceedings before the Federal Energy Regulatory Commission on markets issues as they concern PJM's wholesale power market, it said.

Meanwhile, FES said it has refreshed its 2018 business plan, and it has generating several long-term scenarios. Scenarios to maximize future value could include separating shared service functions from FirstEnergy Corp. to "establish standalone operations, identifying synergies among the fossil and nuclear generating plants, including the potential inclusion of Pleasants Power Plant, and evaluating the merits of various other cost-cutting and operational improvement initiatives," it said. It said a final business plan could be completed by the beginning of 2019.

-Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)

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