What Unit's Bankruptcy Means for FirstEnergy
The main issue for shareholders will be the size of settlement payment to creditors.
We are reaffirming our $40 per share fair value estimate and narrow moat rating after FirstEnergy’s (FE) merchant subsidiary, FirstEnergy Solutions (FES) filed for Chapter 11 bankruptcy. The bankruptcy and its timing before an April 2 bond payment was not a surprise, but we had assumed that a prepackaged bankruptcy was likely. A March 31 news release, indicated negotiations with a steering committee of FES noteholders are ongoing. Thus, a settlement, that we believe would lead to an outcome not-too-different financially from a prepackaged bankruptcy, is still possible.
We were pleased to see that FirstEnergy continues to be advised by its Restructuring Working Group, that includes two members from the investor group that made a $2.5 billion equity investment in FirstEnergy in January. The interests of these prominent investors are in line with shareholders and brings a level of experience to the negotiations that FirstEnergy management doesn’t have.
We believe investors should not be distracted by last week’s attempt by the company to have Energy Secretary Rick Perry declare a grid emergency and guarantee profit for money-losing coal and nuclear plants. FirstEnergy indicated that without assistance, it would be forced to shut its three nuclear power plants in Ohio and Pennsylvania by 2021. Although government assistance could help FES noteholders, the ultimate owners of the plants, it would likely be too little and too late to help FirstEnergy. We value FES' powerplants, even with government assistance, at over $1 billion less than the $3 billion of FES debt.
In our opinion, the main issue for FirstEnergy shareholders is the settlement payment to noteholders in addition to the $1.7 billion of FirstEnergy’s unfunded liabilities and other cross-guarantees. We assume a settlement payment of $1 billion to creditors to avoid years of litigation. The total of $2.7 billion is included in our fair value estimate.
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Charles Fishman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.