FirstEnergy Corp., headquartered in Akron, Ohio, is regaining value and trust among various stakeholders and investors since a July 2020 corruption scandal rocked its public image. Source: FirstEnergy Corp.

The man steering FirstEnergy Corp.'s transformation is on a mission to regain the company's value and restore trust as he transitions the utility into a clean energy provider and an attractive investment.

Steven Strah, a 37-year company veteran who began his career as a meter reader, has been guiding the Akron, Ohio-headquartered utility through a turbulent time that includes the termination of several senior executives and admission of the company's role in a bribery scheme tied to the passage of Ohio's nuclear subsidy law.

"We're really building some very positive momentum going forward to be that forward-thinking FirstEnergy that we know we can be and I believe we've made significant progress over the course of the last 12 months," Strah told S&P Global Market Intelligence.

That progress includes an agreement with federal prosecutors on criminal charges, replacing much of the company's senior leadership and selling a stake in FirstEnergy's valuable transmission business.

Strah, who became president of FirstEnergy in May 2020, on March 8 was named CEO and member of the board of directors.

FirstEnergy President and CEO Steven Strah Source: FirstEnergy Corp.

He was appointed acting CEO on Oct. 29, 2020, after the firing of former CEO Charles Jones Jr. and two senior executives as part of an internal review.

"[A]fter the events we've been through, we're focused as a company at looking through our windshield and not in the rearview mirror," Strah said in an interview earlier this month. "I think we've done a lot of very hard work as a company to do the right thing. And as we move forward in a renewed atmosphere of keeping compliance, ethics, integrity at the core of what we do, we believe we have a very bright future ahead and we've done the hard work to get our car headed in the right direction here and that path is very bright."

Moving forward

The company launched an internal review after the U.S. Attorney's Office for the Southern District of Ohio and the FBI on July 21, 2020, announced the filing of criminal charges against the then-speaker of the Ohio House of Representatives and four associates involved in an alleged "pay to play" scheme. The five individuals were accused of accepting millions of dollars in bribes and using a "slush fund" to ensure the enactment of House Bill 6, the state's now largely repealed nuclear subsidy law.

Larry Householder, the former speaker, has been charged with racketeering. He pleaded not guilty in September 2020 and in June was removed from the Ohio House of Representatives. He has denied any wrongdoing and his trial is not expected to start until 2022.

The former chairman of the Ohio Republican Party also has pleaded not guilty, while two associates entered into plea agreements. Lobbyist and defendant Neil Clark was found dead March 15 in Florida.

In an agreement with federal prosecutors filed almost exactly a year later, FirstEnergy admitted that the company and its past and present affiliates funneled nearly $60 million through "dark money" groups to secure the legislative bailout of two merchant nuclear plants.

As part of a three-year deferred prosecution agreement, FirstEnergy has agreed to pay a $230 million fine. A "conspiracy to commit honest services wire fraud" charge will be dismissed as long as FirstEnergy fulfills the terms of the agreement which includes compliance improvements.

Jones spoke out against the agreement and maintained his innocence.

"Mr. Jones did not engage in any unlawful activity or violate any of FirstEnergy's policies," a public relations consultant said on behalf of the former CEO. "Mr. Jones did not make or authorize any payment of any money to any public official in exchange for any official act."

Federal prosecutors have declined to say whether Jones or other former executives could be charged in the bribery case in Ohio.

Strah pointed to the deferred prosecution agreement as an important step forward.

"As I view the future and the way that we will operate going forward, it is going to be in a very open and collaborative and constructive approach," Strah said. "We did do the challenging work associated with getting the deferred prosecution agreement completed with the Department of Justice and that was necessary. While it was challenging, it was a significant step forward for our company."

The company's stock closed at $38.36 in heavy trading on July 22, compared with a year earlier, when FirstEnergy stock nosedived to $27.09 as federal prosecutors detailed charges tied to a federal racketeering conspiracy case.

Rebuilding trust

Strah noted that the company has made significant strides since the scandal muddied its public image and trust within the investment and regulatory community.

"As we move ahead, we will continue to rebuild that path of trust and confidence brick by brick," Strah said.

The steps the company has taken so far include senior management changes and reaching a deal with billionaire activist investor Carl Icahn's Icahn Capital LP to add two members to the company's board of directors. FirstEnergy also appointed a chief ethics and compliance officer, hired a new chief legal officer and a new vice president of rates and regulatory affairs. John Somerhalder took over as vice chairman of the board and executive director earlier this year.

"We had to terminate several key executives, and the board did that very promptly," Strah said. "We integrated onto our board new, independent directors that have brought great levels of various experiences, diversity of thought, enabling us to move ahead. We've created a new executive team in which we've added to an already excellent team that can drive operations and drive performance."

The CEO declined to directly address whether he had any personal knowledge of money funneled to those involved in the Ohio bribery investigation.

"If you look at the deferred prosecution agreement and the summary of facts associated with that, I think that agreement and the summary speaks for itself," said Strah, who signed the agreement and has not been charged in the case.

The company is a defendant in several class-action and shareholder lawsuits, and remains under investigation by the U.S. Securities and Exchange Commission. The Federal Energy Regulatory Commission and the Public Utilities Commission of Ohio have also launched multiple audits and political spending reviews.

"As for other reviews or other investigations that are ongoing, as I've always said, I want to respect that process," Strah said. "I don't want to jump ahead of that process or encumber it in any way. We are just going to let those issues play out."

'Tangible actions'

Wall Street analysts and industry observers are taking note of FirstEnergy's transformation. The company's stock closed at $39.94 on Dec. 15 and its market cap is nearly $23 billion.

"I give the company and the management team a lot of credit for righting the ship both in terms of regulatory relationships as well as the financial outlook. It seems very much like they are back on track," Scotia Capital (USA) Inc. analyst Andrew Weisel said in a phone interview.

Moody’s analyst Jairo Chung said the rating agency believes FirstEnergy "has achieved quite a bit" since July 2020.

"Our view is the company has taken actions, tangible actions, to improve its business risk profile but it's now on how can they improve their financial profile," Chung said. "We would like to see the company maintaining the current level of risk. One of the things we look at is the company's track record. So, we fully get it. They've done a lot. But can they maintain that over the next 12 months or so?”

Transmission sale

Among FirstEnergy's significant actions is the sale of an equity stake in its coveted transmission business.

FirstEnergy on Nov. 7 announced it will sell a 19.9% stake in FirstEnergy Transmission LLC to Brookfield Super-Core Infrastructure Partners LP for $2.4 billion in an all-cash transaction. Management also announced it will issue $1 billion of common stock to Blackstone Infrastructure Partners LP at $39.08 per share. The company consummated the private placement on Dec. 13.

The combined $3.4 billion in proceeds is expected to boost FirstEnergy's balance sheet, eliminate near-term equity needs and support the company's investment plans.

FirstEnergy management projects a 13% funds from operations-to-debt ratio no later than 2024 based on the transactions.

"Everyone saw that deal coming," CreditSights analyst Andrew DeVries said referring to the FirstEnergy Transmission sale, "but the fact that they raised another $1 billion of equity on top of that was just a huge show of goodwill and acceleration of this turnaround to bondholders.”

The analyst said the equity deals should get FirstEnergy to investment-grade credit ratings "a lot quicker" than previously predicted, possibly before the end of 2022.

Chung said Moody's is going to "take our time" upgrading FirstEnergy: "Let's see the money come in the door and let's see how the company is going to use it."

In what Strah and the investment community see as another positive development, FirstEnergy's utilities will return about $306 million to Ohio electricity customers through a combination of bill reductions and refunds as part of a wide-reaching settlement agreement involving several regulatory cases.

"That openness and the ability to collaborate is different today than what it was in our past," Strah said. "That’s the way I intend to lead and our management [team] intends to lead into the future."

FirstEnergy's future

As for the future and the sector's energy transition, the CEO said the pure-play transmission and distribution company "has a number of very important roles to play."

FirstEnergy serves more than 6 million retail electric customers through 10 regulated electric companies and plans to make investments that improve reliability and integrate new technologies.

Along with the strategic transactions, FirstEnergy on Nov. 7 announced a $2.2 billion increase to its capital investment plan through 2025. The $17 billion capital plan includes a $10 billion budget for sustainable energy investments.

FirstEnergy also introduced a long-term 6% to 8% annual earnings growth rate.

"That's what the 5-year to 10-year look is for us. It is supporting more fully that energy transition," Strah said. "I think we are positioned very well to be a key participant in it.”

ESG role

Environmental, social and governance practices also will be at the center of FirstEnergy's business plan, according to the CEO.

FirstEnergy in November 2020 pledged to achieve carbon neutrality by 2050 and is aiming to reduce greenhouse gas emissions by 30% by 2030, based on 2019 levels.

In addition, Strah said the company has "greatly improved our governance over the past 12-month period by some of the actions that we've taken here."

"We are certainly well down the road to strengthening our ethics and compliance program.”