FirstEnergy’s billion-dollar debt was downgraded following the firing of CEO Chuck Jones over possible illicit activities related to Larry Householder’s $61 million corruption investigation.
Fitch Ratings downgraded Friday late afternoon FirstEnergy’s debt at its BBB- rating of BBB, meaning it believes Akron’s utility debt is now riskier after the layoffs of Jones and two other executives on Thursday. The ratings outlook was also revised down from stable to negative.
The leading credit rating agency said it could not rule out FirstEnergy or a subsidiary being accused of criminal activity and if that happened it could hurt the utility’s financial performance.
“The ratings actions reflect the termination of three senior executives, including former FirstEnergy CEO Charles E. Jones, and two other senior executives, as well as ongoing credit concerns regarding potential illicit activity at FirstEnergy in connection with the ‘an ongoing federal corruption/racketeering investigation,’ Fitch said in a release.
Fitch noted that the Justice Department investigation led to criminal charges against the former Ohio House House speaker, four other men and the nonprofit Generation Now for bribes. related to the passage of House Bill 6 which provides more than $1 billion in subsidies to two former FirstEnergy nuclear power plants in Ohio.
“Although the indictment does not explicitly name FirstEnergy or its affiliates, the pseudonyms mentioned in the affidavit are widely believed to refer to FirstEnergy, its business services subsidiary, FirstEnergy Service Company, and its former subsidiary , Energy Harbor,” Fitch said.
Energy Harbor is the former FirstEnergy Solutions, the utility’s generation arm that was spun off from FirstEnergy in February following a lengthy Chapter 11 bankruptcy process. Energy Harbor owns the nuclear plants Davis-Besse and Perry which benefit from House Bill 6 subsidiaries.
“Although FirstEnergy and its subsidiaries were not named in the DOJ investigation, future criminal charges against FirstEnergy and its business services subsidiary, FirstEnergy Service Company, cannot be ruled out in light of the allegations of payment for play contained in the affidavit,” Fitch mentioned. “If FirstEnergy or FirstEnergy Service Company becomes the target of a criminal investigation and is ultimately convicted, FirstEnergy could be subject to fines and penalties, civil lawsuits and resulting financial pressures, reputational risk , regulatory and political challenges, a higher cost of capital and an erosion of confidence in the management and effectiveness of its corporate governance and internal controls.
Fitch said he believed continued uncertainty about the utility’s internal controls was a key source of credit concern. If this uncertainty is not effectively and quickly reversed, it could lead to future adverse credit rating actions, the agency said.
“Fitch believes that the failure of internal controls significantly increases the risk of further adverse developments at FirstEnergy, weakening its business risk profile,” it said in its statement.
House Bill 6 also appears to be at stake in the federal investigation, Fitch said.
If House Bill 6 is reversed, it could hurt the business risk profiles of FirstEnergy subsidiaries, Ohio Edison, Cleveland Electric Illuminating and Toledo Edison, Fitch said.
FirstEnergy had a total of $22.2 billion in debt across all of its operations as of June 30, including $7.8 billion in parentage debt alone, Fitch said. FirstEnergy has higher debt than many of its peers, including American Electric Power and Exelon, the agency said.
FirstEnergy’s debt was previously rated BBB- by Fitch. Fitch in November 2019 upgraded FirstEnergy’s debt from BBB- to BBB and changed the outlook from positive to stable following the court’s initial approval of FirstEnergy Solutions’ plan to reorganize in the Chapter 11 bankruptcy proceedings.
Jim Mackinnon covers the business. He can be reached at 330-996-3544 or [email protected] Follow him @JimMackinnonABJ on Twitter or www.facebook.com/JimMackinnonABJ.