After tirelessly reiterating its commitment to exit its "commodity-exposed" business for several months before and after the unit's eventual bankruptcy filing, FirstEnergy Corp. is now defending its role in an alleged "pay to play" corruption scheme used to prop up two unregulated Ohio nuclear plants.
The Akron, Ohio-headquartered investor-owned utility spent about $15 million to support subsidies for the massive merchant nuclear plants embroiled in a federal investigation that sent the company's stock tumbling and at least temporarily tripped up its regulated success story.
On a July 24 earnings call in which FirstEnergy CEO Charles Jones Jr. hoped to discuss the company's "great quarter" managing load declines caused by the coronavirus pandemic, he instead had to devote the bulk of his time answering questions on the company's support for H.B. 6.
"We gave our support because FirstEnergy has the obligation to serve 2 million customers in the state of Ohio, including looking out for their long-term energy supply, even though we are no longer in the competitive generation business and would not get a single dollar of the House Bill 6 funding for those plants," Jones said.
The federal bribery investigation represents the latest twist in a yearslong fight to subsidize certain nuclear and coal assets in Ohio. And while FirstEnergy may suffer some consequences depending on the extent of its involvement in any alleged scheme, it is not clear how severe the repercussions may be for the company, particularly because it has worked so hard to extricate itself from ownership of the assets at the center of the scandal.
Near-term pain
News of the bribery investigation sent FirstEnergy's shares plunging July 21 before closing down almost 17% at $34.25. Shares dropped another 20.91% on July 22, closing at $27.09 as it became clear FirstEnergy and its entities were described in the affidavit as the primary source of about $60 million in "dark money" funding.
CreditSights analyst Andrew DeVries told S&P Global Market Intelligence that the news would likely lead to an executive shakeup, and Scotia Capital (USA) Inc. analyst Andrew Weisel downgraded FirstEnergy's stock.
"[I]t seems quite likely to us that things will get worse for [FirstEnergy] before they get better," Weisel said.
But Morningstar analyst Charles Fishman contended that "the market overreacted to the news."
"There was nothing in the complaint that gave me that much concern as far as FirstEnergy," Fishman said in a July 27 phone interview, while acknowledging "another shoe could always fall."
Wall Street has taken a more positive view of the company in recent days.
The case
Federal prosecutors filed bribery charges against former Ohio House Speaker Larry Householder and four associates, including lobbyists, who have been indicted and accused of using "more than $59 million" through a "slush fund" used to steer the nuclear subsidy bill through the Ohio Legislature. An affidavit filed by an FBI special agent said "Company A" and affiliated entities wired funds through a 501(c)(4) nonprofit group called Generation Now, which was also charged in the indictment, to support H.B. 6 and Householder-backed candidates in the Ohio House of Representatives.
"Company A paid the Enterprise millions of dollars in exchange for the Enterprise's efforts to pass HB 6 because it received '$1.3 billion in subsidies' in return — the essence of the corrupt exchange," the affidavit states, with the U.S. Attorney's Office for the Southern District of Ohio and the FBI alleging these payments occurred between March 2017 and March 2020.
The affidavit and an indictment filed July 30 in the U.S. District Court of the Southern District of Ohio state that from August 2019 through November 2019, after H.B. 6 was signed into law, "Householder's Enterprise received over $38 million into Generation Now from Company A" with $23 million then transferred to "Front Company," which was formed to defeat a ballot initiative seeking to repeal the legislation.
Householder allegedly received more than $400,000 for his personal benefit to settle a personal lawsuit, pay for costs associated with a residence in Florida and to pay off thousands of dollars of credit card debt, according to prosecutors.
"Make no mistake, these allegations are bribery, pure and simple. This was a quid pro quo. This was pay to play," U.S. Attorney David DeVillers said at a July 21 press briefing.
Subsidiary FirstEnergy Service Co. and former subsidiary FirstEnergy Solutions Corp., which emerged from bankruptcy in February as Energy Harbor Corp., have also received subpoenas in the corruption probe.
'No direct financial benefit'
Fishman said he believes Jones has been "sincere" in his comments regarding support for nuclear generation and the company's split from FES.
"I think the guy is an honest, decent guy. I really do," Fishman told S&P Global Market Intelligence. "I just don't think there was anything dishonest, unethical, illegal going on as far as FirstEnergy."
The analyst noted FirstEnergy's argument is further supported by the timeline of its separation from FES, the March 2018 bankruptcy filing and the April 2019 filing of H.B. 6.
In November 2016, FirstEnergy management said the competitive business was under strategic review, could file for bankruptcy and installed a new board to oversee FES.
 FirstEnergy CEO Charles Jones Jr. Source: FirstEnergy Corp. |
"FirstEnergy really at that point has no direct financial benefit in H.B. 6," Fishman said.
The Morningstar analyst said he does not expect any significant impact to the company's credit ratings or balance sheet.
"I don't think they'll be that greatly penalized," Fishman said. "From a financial standpoint, I don't see anything that significant."
The analyst characterized the contributions as the "normal course of business for a regulated utility attempting to influence energy legislation or at least countering the arguments of others with opposite interests."
CreditSights, in a July 23 report, said it believes FirstEnergy's balance sheet "can support a $2 billion entirely debt funded penalty/fine/legal settlement" and still maintain the minimum requirement for investment-grade credit ratings, but expects the "ultimate fine and penalties to be closer to the $500 million range."
DeVries also has pointed to settlement terms and shared services agreements between FirstEnergy and FES as further proof that "[FirstEnergy] didn't benefit financially from any bailout of FES plants."
In addition, the subsidies for the nuclear plants are not set to begin until 2021, "so there is no clawback or tripling of damages for this nuclear bailout stream."
The legislation, however, also includes decoupling provisions, which the FBI affidavit alleges did directly benefit FirstEnergy by allowing the company to charge retail customers for lost annual revenue based on a 2018 baseline.
Ohio distribution utilities also are permitted to collect up to $1.50 per month from residential customers and up to $1,500 monthly from commercial and industrial customers to subsidize the Ohio Valley Electric Corp.-operated Kyger Creek and Clifty Creek coal plants. Subsidiaries of FirstEnergy and Columbus, Ohio-headquartered American Electric Power Co. Inc. have a combined 47% ownership interest in the two plants, according to S&P Global Market Intelligence data.
A controversial bill
Signed into law in July 2019, H.B. 6 provides $150 million in annual subsidies for Ohio's nuclear plants, owned and operated by Energy Harbor. The law directs Ohio's electric distribution utilities to collect a monthly charge from customers to support a $9/MWh credit for certified clean air resources, primarily the 908-MW Davis-Besse and 1,268-MW Perry nuclear plants. The legislation also provides ratepayer-backed funding for two Ohio Valley Electric-operated coal plants, one of which is in Indiana.
FirstEnergy Solutions, or FES, in March 2018 notified PJM Interconnection of its plan to retire the Davis-Besse and Perry nuclear plants in Ohio, as well as the 1,872-MW Beaver Valley nuclear plant in Pennsylvania within the next three years. The notice came as the company advocated for policy solutions that compensate the nuclear assets for their carbon-free generation.
FES also asked the U.S. Department of Energy to issue an emergency order requiring PJM to compensate at-risk coal and nuclear plants "for the full benefits they provide to energy markets and the public at large."
Days later, FES filed for Chapter 11 bankruptcy protection as FirstEnergy embarked on a $2.5 billion investor-backed strategic transition.
Jones, however, continued to advocate for state and federal support for unregulated baseload generation.
"I continue to feel that the market policies in our [country] have severe flaws," Jones said on an August 2018 earnings call. "Closing perfectly good nuclear plants in the long run is not going to be a good thing for our country. ... So, to the extent my voice matters in this process I'm going to continue to be a loud advocate for it."
Subsidy fight continues
Shortly after H.B. 6 was signed into law, Ohioans Against Corporate Bailouts began collecting signatures for a statewide referendum to repeal it. The advocacy group ultimately dropped its effort after "tens of millions of dollars" were spent by Generation Now to defeat the ballot initiative. Federal prosecutors allege this funding was supplied by "Company A."
"Bank records and text messages between [Householder political consultant Jeffrey Longstreth] and [lobbyist Juan Cespedes] show that Company A funded the entire campaign," the FBI affidavit states. "For just the House portion of the media blitz, Company A wired approximately $9.5 million into the main Generation Now account between April and May 2019."
"There was a lot of money spent on both sides and 501(c)(4)s were used on both sides," Jones said on FirstEnergy's recent earnings call.
The battle over H.B. 6 comes after the Federal Energy Regulatory Commission stepped in and halted previous efforts by AEP and FirstEnergy to subsidize their unregulated coal and nuclear plants. Prior legislation stalled in the Ohio Legislature but as FES navigated its bankruptcy, the power provider held out hope for policy support as it explored asset sales or shutdowns.
A PJM analysis presented to Ohio lawmakers in June 2019 showed "with expected new gas units coming online and all FirstEnergy Solutions nuclear units retiring, the wholesale energy market will produce $1.6 billion in annual savings by 2023."
About a month later, the Ohio Senate voted 19-12 to approve H.B. 6 before recessing for the summer under growing pressure from FES.
Republican Ohio Gov. Mike DeWine now supports the bipartisan effort to repeal the law.