FirstEnergy Corp., based in Ohio, has reached a settlement with holders of pollution control tickets issued by its bankrupt subsidiary FirstEnergy Solutions that depends on the outcome of an asset sale.
First Energy Solutions Corp. and its affiliates filed for Chapter 11 in Akron, Ohio on March 31. power plants in the competitive or unregulated electricity generation industry.
The deal includes a combination of cash payments and tax notes designed to provide $628 million in value to creditors, according to a securities filing. The creditors, who hold $1.8 billion worth of pollution tickets, agreed to work hand in hand to sell or recapitalize the assets to increase the amount recovered.
Justin Merriman/Bloomberg
There is no cash payment. First Energy and FES have agreed to share any sale proceeds greater than 60 cents on the dollar with debenture holders. Senior bondholders will have the first dibs on the sale proceeds whenever it occurs.
The agreement represents a “significant step towards the final exit from bankruptcy of FES, its related entities and FENOC,” FirstEnergy said in a press release on Monday.
FES and its subsidiaries have $516 million in pollution control tickets expiring between April and December 2018 and $1.3 billion in pollution control tickets expiring between 2019 and 2021. Approximately $612 million dollars of debt are in secured notes, the remainder in unsecured debt issued by Beaver County Pennsylvania Industrial Development Authority, Ohio State Air Quality Development Authority and the Ohio Water Development Authority.
The private power plant operator sold the debt to fund air and water pollution control facilities and sewage and solid waste facilities at its power plants. Under Internal Revenue Service rules, bonds for such pollution control projects are eligible for tax exemption.
“I’m surprised at how quickly the ad hoc group of bondholders and FES came to an agreement,” said Dean Myerow, portfolio manager at Las Olas Wealth Management of NatAlliance Securities LLC. “This bodes well for creditors, as complex cases like this have the potential to be litigious for years.
Under the settlement, First Energy and FES have reached a tentative agreement to share 50/50 of any business salvage value above 60 cents on the dollar for up to three years after the plan’s effective date. .
Myerow said the settlement agreement between creditors FE and FES proposes a distribution based on the tax savings from the settlement of the proposed tax sharing agreement. FE will waive the 2017 overpayment owed by FES/FENOC and reinstate the 2018 compensation amount. “, Myerow said.
The tentative agreement, which has yet to be approved by the bankruptcy court, commits FirstEnergy to provide assistance to FES and FirstEnergy Nuclear Operating Co.
It also bodes well for the employees of First Energy Solutions. “My reading of the term sheet suggests FE will pay existing pre-petition claims for pensions, deferred severance, life insurance and long-term equity incentives,” Myerow said. “This is a huge win for employees who won’t face lengthy litigation.”
If approved, the settlement would release FirstEnergy from all claims and liabilities in the Chapter 11 proceedings.
FirstEnergy said the two groups of creditors who signed the terms would seek approval from the official committee of unsecured creditors, as well as any other key creditors by June 15.
FirstEnergy Solutions, its subsidiaries and FENOC filed for Chapter 11 bankruptcy on March 31. The distribution, transmission, regulated generation and Allegheny Energy Supply subsidiaries of FirstEnergy Corp. were not part of this file.
Prior to the filing, the company had already announced its intention to shut down all three nuclear power plants and has shut down several coal-fired generators since 2012. On March 29, it filed a petition with US Energy Secretary Rick Perry asking for federal intervention. to save society’s unregulated coal. and nuclear power plants. The proposed intervention would be a “grid emergency” that would require the electric grid operator to guarantee profit from the company’s coal and nuclear generators, according to Bloomberg News.
FirstEnergy CEO Chuck Jones said on a conference call with analysts and investors on Monday that the deal would mean a clean break with the cash-strapped subsidiary, although he plans to continue to personally lobby. for the unit’s coal and nuclear power plants to operate.
Jones also intends to continue to press for “regulatory or legislative solutions, including FES’ request to the U.S. Department of Energy for an emergency order under the Federal Power Act” for financial support for old coal-fired nuclear power plants. Under the deal with creditors, if the amount of coal or nuclear subsidies exceeds a certain threshold, “then, yes, we will share some of it. But that’s not why we’re doing it,” said Jones.
S&P Global Ratings raised its outlook for FirstEnergy to “positive” based on the deal and affirmed the parent company’s BBB-minus rating. The revised outlook means there is potential for the utility ratings to improve over the next 12 months, S&P said. Moody’s Investors Service rates the utility Baa3, stable outlook.
On April 2, S&P lowered its issuer credit rating on FES to D from CCC-minus and downgraded all issue-level ratings to D. Moody’s withdrew the rating from FES.
Myerow said that on news of the deal, unsecured bond bonds jumped in value Monday morning “from high 20s to mid 40s, overnight.” Senior bonds traded between the high of the 80s and the low of the 90s depending on their age.
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