FirstEnergy’s strong quarterly financial performance hasn’t saved it from a continued punishment on Wall Street or CEO Charles Jones from spending much of an hourlong Friday earnings call defending the Ohio utility against the implications of its involvement in a federal corruption and racketeering investigation tied to last year’s passage of House Bill 6.
FirstEnergy reported second-quarter revenue of $2.5 billion and earnings of $309 million, or 57 cents per share on a GAAP and operating earnings basis, at the upper end of its earnings guidance. It has received positive regulatory rulings for COVID-19 pandemic-related cost recovery and has access to about $3.5 billion in liquidity over the next year to manage further disruptions. And it affirmed long-term growth projections of 6 to 8 percent compound annual operating earnings growth from 2018 to 2021.
But the positive financial picture didn’t help FirstEnergy’s shares recover from the hit they took last week after Ohio House Speaker Larry Householder and four associates were arrested on federal charges of conspiring to direct $61 million toward efforts first to pass a law subsidizing nuclear power plants operated by former subsidiary FirstEnergy Solutions and then to defend it against a popular referendum to overturn it.
The affidavit filed by the U.S. Attorney’s Office of the Southern District of Ohio doesn’t directly name FirstEnergy, referring instead to “Company A” and other unnamed subsidiaries. But U.S. Attorney David M. DeVillers made it clear that FirstEnergy and subsidiaries are the companies identified as sources of the money, which went to a nonprofit group controlled by Householder and his alleged accomplices, and FirstEnergy acknowledged that it has received federal subpoenas related to the investigation.
FirstEnergy shares plummeted from more than $41 last Tuesday to less than $25 on the following day, and have since traded at about $30. Friday’s earnings report yielded no discernible uptick, with shares trading at about $29 as of mid-Monday.
Jones opened Friday’s call by stating that “at no time does our support for nuclear plants in Ohio interfere or supersede our ethical obligations to conduct our business properly. The facts will become clear as the investigation progresses, and we support bringing the facts forward.”
He also noted that “we are no longer in a competitive generation business and would not get a single dollar of the House Bill 6 funding for those plants.”
FirstEnergy Solutions, the owner of the nuclear power plants set to receive about $1.2 billion in subsidies over the next 10 years because of House Bill 6, emerged from bankruptcy under new ownership and the new name Energy Harbor earlier this year.
In response to a question about how much of the $61 million referenced in the affidavit was from FirstEnergy versus its former subsidiary, Jones said FirstEnergy’s share is about 25 percent. “We intend to provide the details on what we spent [and] how we spent it to the Department of Justice in the coming weeks.”
He also said the company plans to do “an internal review of everything involved in the affidavit, which obviously is going to be necessary for us to respond to the questions in the subpoena.”
FirstEnergy CEO says that payment to lobbyist did not come from him
Jones declined to respond in detail to other questions during Friday’s conference call, such as one asking him to expand on the affidavit’s statement that Householder had 84 phone contacts with FirstEnergy’s CEO from February 2017 to July 2019.
“I talk to a lot of people, I text with a lot of people, I probably text more than I talk these days. So we have to see what they're talking about,” he said. “I can tell you this, in every meeting, every phone call, every text message that I participate in, I talked about our obligations to conduct our business transparently, ethically, professionally,” he said.
In response to another question regarding the affidavit’s reference to a CEO of an unnamed company making a payment to a lobbyist arrested last week, Jones said, “I think that the CEO reference in some of that affidavit wasn't me. I don't know who it was, but it was not me, and I've never made a payment directly to a lobbyist in my life nor asked any lobbyists to make a payment to anyone else on behalf of our company in my life.”
Jones also said that a lobbyist arrested last week “did not work for FirstEnergy on House Bill 6, and to my knowledge, they have never worked for FirstEnergy.”
In a Monday statement, Jones reiterated that FirstEnergy had separated its external affairs (i.e., lobbying) efforts from those of FirstEnergy Solutions after its April 2018 Chapter 11 bankruptcy protection filing.
In response to a question about the post-arrest downgrades to FirstEnergy’s credit rating by Standard & Poor’s and Moody’s, Jones said that he had spoken to representatives of both ratings agencies. “I told them that they should not put the...integrity of their ratings on the line for FirstEnergy, that it's my job and our company's executive team’s job to take care of our reputation, and we will do that, but I also told them that we're the same underlying company that existed before Tuesday.”
In response to questions about the potential impact of repealing House Bill 6, a move Ohio Gov. Mike DeWine last week said he supported, Jones said a repeal would not have any significant financial impacts on the utility now that it's separate from Energy Harbor and the nuclear and coal plants that are the main beneficiaries of the law.
Beyond directing subsidies to Energy Harbor’s nuclear plants and coal-fired power plants owned by a utility consortium, the law ends the state’s energy efficiency and renewable energy subsidies that were collected via customers' bills. This allowed the nuclear subsidies to be added to customers’ bills without increasing their overall cost, but reduced an energy efficiency rider that helped pay FirstEnergy’s distribution grid costs.
However, House Bill 6 does allow FirstEnergy to use a “decoupling mechanism” to assure it earns the equivalent returns as it did in 2018 through the start of its next rate case in 2023. But Jones said that this decoupling has so far helped reduce customer costs for residential customers who have been forced by COVID-19 pandemic-related stay-at-home orders to increase their energy use amid hotter-than-usual summer weather.