October 31, 2016 Read More →

Even With Its Vast Plentitude of Ratepayer Subsidies, FirstEnergy Is Failing

Dan Shingler for Crian’s Cleveland Business:

Chuck Jones needs to find about $200 million.

That’s roughly the amount that Jones, CEO of Akron-based FirstEnergy Corp., says he needs to find in cost savings to preserve his company’s credit rating — and ultimately to stay independent.

It will mean cuts to FirstEnergy’s expenses. That includes payroll, though not necessarily with layoffs, as well as the closing of some unprofitable plants and other cost-saving measures.

The goal is to keep FirstEnergy from being purchased by a competitor, Jones said.

“But there’s blood in the water,” because of FirstEnergy’s weakened state, he warned in an interview last week with Crain’s Cleveland Business.

It’s not just FirstEnergy’s future at stake. The company employs more than 1,300 people in Akron, and its corporate payroll is more than $150 million a year. If the city were to lose the company, which is its second-largest employer behind Summa Health System, Akron would take a hit in terms of total economic benefit of between $500 million and $600 million a year, FirstEnergy estimates.

The challenge facing the company could be worse, though.

Up until Oct. 12, Jones was looking to fill a $400 million hole in its balance sheet. FirstEnergy had asked the Public Utilities Commission of Ohio to grant it a special rate rider — an add-on charge to ratepayers’ bills — that would have provided the company the full amount it said it needed. But instead of the $375 million to $400 million the company was seeking, Ohio’s utility regulators essentially gave FirstEnergy half of the money it was seeking, or about $200 million.

Jones is disappointed, but also thankful and ready to move on if he can.

“It’s $200 million a year that we didn’t have before this rate case,” Jones said in the Oct. 26 interview.

He also knows the PUCO was under pressure not to give FirstEnergy anything. Many environmental groups complain that the payments are no more than a subsidy to keep outdated power plants operating, while consumer groups say they will unduly burden seniors and low-income residents.

Some in opposition have said they’ll ask the PUCO to rehear the case. If that were to happen, Jones said he’d likely use the opportunity to argue for more money. But Jones said his primary focus now is on how to cut costs in the wake of the rate case.

“Basically, I think it’s time to get this process behind us,” Jones said.

He pointed out that it took nearly two-and-a-half years for the rate case to wind its way to its current state — a process that involved many hearings, lots of testimony before the PUCO and even an earlier, more generous rider-based subsidy that was struck down in April by the Federal Energy Regulatory Commission.

FirstEnergy is in a tough spot. The company’s revenues have dropped steadily in recent years, from $16.1 billion in 2011 to $15 billion in 2015. The company has been stuck with its old coal and nuclear plants, as new competitors have cut into its sales, often with power from new plants that burn now-abundant (and cheap) natural gas to produce electricity.

FirstEnergy’s stock has reflected that as well.

“If you think back to 2008, FirstEnergy’s stock price peaked at like $82 or $83 (per share), (and) the market cap was $35 billion. Our market cap was greater than the big three automakers all put together. We were doing very well,” said Jones, who has worked at FirstEnergy for more than 30 years. “Today, our market cap’s about $14 billion,” he noted.

In other words, it’s more than half-off for any would-be acquirer.

With its relatively low stock price of about $33 per share, Jones said FirstEnergy shares trade at a multiple of about 12 times the company’s earnings. That multiple is a benchmark by which companies measure their strength, and many of FirstEnergy’s competitors are much stronger, with shares trading at 20 times their earnings or more, Jones said.

That’s what Jones means when he says “there’s blood in the water” — a phrase he uses often.

Companies with higher stock prices can more easily buy companies with lower stock prices, and then reap the rewards by cutting costs from the acquired company. Usually, that means closing or all-but-closing the company’s headquarters, something FirstEnergy itself has done repeatedly over the years as it bought other power companies, Jones said.

Jones does not want to be on the other end of that equation, but he said he can’t rule it out or even control whether it happens.

“There is absolutely no chance that I personally would leave Akron,” Jones said. But, he quickly added, “I also have a fiduciary duty to shareholders.”

Neil Kalton, who follows FirstEnergy as a senior securities analyst for Wells Fargo in St. Louis, declined to discuss which companies might find FirstEnergy attractive. But he said there is a consolidation trend at present in the electric utilities industry.

“There has been merger and acquisition activity in the industry and it’s been fairly substantial over the past couple of years,” Kalton said.

Kalton had no trouble discussing FirstEnergy’s predicament, however, and he agreed with Jones that unless the company can shore up its balance sheet, it risks seeing its debt lowered to junk-bond status, which would increase its borrowing costs for any future projects or improvements, as well as impact its current earnings.

“Their debt at the parent (company) is about $5 billion,” Kalton said. “So they have a tremendous amount of debt at the parent. And they have about an equal amount at their generation unit, FirstEnergy Solutions. So they have some real challenges in front of them.”

Jones started working on costs when he became CEO at the beginning of 2015. He said he wanted to rely on ratepayers as little as possible to shore up the company and make up for lost revenues, but he couldn’t cut enough, fast enough, he said.

“We’ve reduced benefits, we’ve reduced 401(k) matches, we froze wages,” Jones said. “We’ve done a lot of things to try and offset lost revenue, but couldn’t offset it entirely.”

Cost reductions are likely to become harder to find, Kalton said.

“When Chuck Jones came into place, he did implement some substantial cost cutting, and they’ve done a lot on that front already — so, you’re right, they’ve picked a lot of the low-hanging fruit,” he said. “But I think there is some more cost-cutting that can be achieved over the next several years.”

Jones said nearly everything is on the table, but that he will be as transparent as possible and unveil new cost-cutting measures as they are decided upon. The company already has said it will close five of its power plants by sometime in 2020.

FirstEnergy must cut costs to avoid credit downgrade

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