There was a flurry of activity yesterday afternoon in the wake of FirstEnergy Corp.’s quarterly conference call with stock analysts, with hints from some citizen bloggers that the company was on the verge of dropping its proposal to transfer the Harrison Power Station to its West Virginia subsidiary, Monongahela Power.
StopPathWV’s headline read “Harrison is no longer critical.” Bill Howley initially labeled his Power Line post, “CEO Alexander May Pull Plug on Harrison Scheme,” and wrote:
Tony seems to be sending signals that FirstEnergy may be dropping their Harrison power plant transfer to Mon Power.
Bill has since edited the headline to say, “CEO Alexander Spinning on Harrison Scheme,” and has a more detailed post that puts a more thoughtful perspective on things.
After listening to the call yesterday and reading the transcript this morning, I’m not at all sure the news is nearly as big as folks were making it sound. But there is an interesting change in FirstEnergy’s talking points that is important in the context of the FirstEnergy and American Electric Power “asset transfer” cases pending at the Public Service Commission. You can read the transcript yourself here, but I’ll try to summarize.
Remember first that there’s a reasonable argument to be made that a huge part of what the FirstEnergy plant sale has been about is raising much-needed money to help the company deal with its debt. The company said as much just a few months ago, during a February call with analysts:
Our financial plan is structured to improve the balance sheet, enhance liquidity and maintain investment-grade credit metrics. The plan initially focuses on reducing debt at our competitive companies, primarily FES and Allegheny Supply, by at least $1.5 billion. The proceeds of the Harrison-Pleasants transaction in West Virginia combined with asset sales are expected to be sufficient to fund the debt reduction. The assets we intend to sell are primarily our competitive hydro fleet, which includes nearly 1,180 megawatts that were initially in our plans to be sold in 2015.
As Keryn Newman’s StopPathWV blog (which has been following all of this very closely) said back in February:
It’s not “to help ensure reliable power for our Mon Power and Potomac Edison customers in West Virginia for many years to come,” it’s to raise desperately-needed corporate cash that West Virginia’s captive ratepayers will be stuck repaying for years to come. Let’s at least be honest about it, shall we, FirstEnergy?
So if you fast-forward to yesterday’s conference call, FirstEnergy officials were explaining steps they’ve taken to deal with their company’s debt issues:
In early March, we issued $1.5 billion of senior unsecured notes at FirstEnergy Corp. in an offering that was positively received. We completed the transaction with a mix of 5- and 10-year notes at very attractive rates of 2.75% and 4.25%, respectively.
We then funded tender offers at FE Solutions or FirstEnergy Solutions and Allegheny Supply — and Allegheny Energy Supply, as we repurchased $665 million of outstanding senior notes. In April, we completed the early redemption of $400 million of FES senior notes that were due in 2015.
We also reduced lease debt by about $100 million with the repurchase of certain remaining lessor interests in connection with the 1987 Bruce Mansfield sale-leaseback transaction, and expect $90 million of additional lease debt to amortize naturally through the remainder of the year. In addition, in April, we issued notice for $235 million of tax exempt bonds, which will be repurchased in early June. Combined, these actions will result in a reduction of long-term debt by about $1.5 billion at our competitive businesses.
In addition, our Met-Ed subsidiary issued $300 million in senior unsecured notes due in 2023, and used the proceeds to refinance $150 million of maturing debt and reduce short-term borrowings. Our Ohio utilities filed a registration statement with the SEC to securitize certain deferred costs, and this process continues to move forward. And finally, we started discussions with our bank groups to extend the maturity of our existing $5.5 billion credit facilities for another year, through May of 2018. We’re also looking to exercise the accordion option, which will increase the total size of the facilities to $6 billion. We expect to complete this process in a few days. By taking these actions to reduce — or to refinance short-term borrowings with long-term debt at rates at that are at historic lows, we have made solid progress on our financial plan we laid out for this year.
Further, we continue to move forward with our plan to sell up to 1,240 megawatts of unregulated noncore hydro generation assets. We have retained an independent advisor and commenced marketing activities with a goal of completing this process in the second half of the year. We plan to use the proceeds to complete our debt reduction plans.
Our success with the actions we have already taken, particularly the bond deal with FirstEnergy Corp. means the Harrison transaction, while still important to both West Virginia and FirstEnergy Solutions, is no longer critical to the successful completion of our financial plan.
Later in the call, Leila Vespoli, executive vice president and general counsel, elaborated:
Turning now to West Virginia. On April 23, we received FERC authorization for the proposed Harrison/Pleasants transaction to transfer nearly 1,500 megawatts from our competitive operations to our Mon Power subsidiary. We await approval from FERC of our filing related to financing for the transaction.
At the same time, we continue to work through the state regulatory process. On April 26, various parties filed their testimony. Rebuttal testimony is due by May 17 and hearings are scheduled from May 29 through May 31. We believe the proposed transaction is good for the state of West Virginia, as it is expected to help ensure reliable power for our West Virginia utility customers for many years to come. The proposed transaction is and remains very positive for the West Virginia economy and our customers of our utilities in West Virginia.
Then came the question-and-answer session. Dan Eggers of Crédit Suisse asked:
Hey, just following up on Tony’s comments and Leila’s comments about Harrison. Can you just maybe help us understand how important it is you think, at this point in time, to move that asset over from a balance-sheet perspective relative to a customer-benefit perspective? And then given kind of the wide — or the low bid made in the intervenor testimony, how important is it to take a lower price or accept a lower price to get this done relative to keeping it at FES if the pricing doesn’t make sense?
James Pearson , FirstEnergy’s chief financial officer, answered, first noting the arguments from opponents to the Harrison plant transfer that the facility is really worth maybe half of where FirstEnergy has it priced:
I think the low price of the $565 million or whatever is, that’s just a nonstarter. So I’ll leave that at that. From a balance-sheet perspective, we think we’re in pretty good shape by getting the FirstEnergy Corp. bond deal down, where we upsized it to $1.5 billion. And we also feel we’re in a very good position with the hydro sales, so we feel real comfortable about that. And as you know, we plan to infuse equity from FirstEnergy down into Mon Power associated with this asset transfer. If the asset transfer doesn’t go forward, we would likely infuse that equity that we have planned for Mon Power down into FES. So I think we’d end up at a good position for the balance sheet there at FES.
Then Tony Alexander jumped back in:
As I’m looking at this, I think this is far more important to West Virginia and Mon Power, in terms of providing them with a stable and long-term resource that they can rely on, than it is, at this point, from a balance sheet standpoint at FES or FirstEnergy.
Eggers of Crédit Suisse followed up:
But if it didn’t transfer, you’d feel comfortable keeping that extra capacity at FES?
Absolutely. It’s a great asset. So that’s not a consideration.
So to summarize, FirstEnergy was saying a few months ago it hoped to use the money from the Harrison deal to help with its debt problems. Now, they’ve taken other actions they say will cure those problems, and that money from the Harrison transfer is no longer needed for that purpose. But is FirstEnergy admitting it’s going to lose the PSC case? Is the company throwing in the towel? Maybe other people are better at reading between the lines that I am, but what I heard from FirstEnergy yesterday was this:
We believe the proposed transaction is good for the state of West Virginia, as it is expected to help ensure reliable power for our West Virginia utility customers for many years to come. The proposed transaction is and remains very positive for the West Virginia economy and our customers of our utilities in West Virginia.
On his blog, Bill Howley has a nice collection of his posts on the FirstEnergy case, including a series of more recent posts that examined the testimony filed late last month by a variety of groups that intervened to oppose the plant transfer. The last in that series is called Common Sense as an Electricity Resource:
It makes sense that before you look around to buy anything, you first make an assessment of what you need. If you can reduce what you need to buy, you will spend less. Common sense.
Go back and look at any of the expert testimony in the Harrison power plant case, particularly testimony by Cathy Kunkel and Jeffrey Loiter. You will see extensive discussion, along with examples from all over the US, about how investing in the reduction of electricity use before building or buying new electric power plants is a less expensive and more reliable way of keeping electric rates low.
Here in WV, the cost of coal-fired electricity from FirstEnergy and AEP, has risen steadily for the last ten years, along with WV electric rates. Because coal-fired electricity was relatively cheap 20 or 30 years ago, WV political leaders and regulators have reflexively supported our Ohio-based power companies’ claims that building or buying more power plants was the best way to meet new electricity needs.
As a result, few people in WV government know anything about the rapid strides the rest of the US has been making in using investment in energy efficiency and demand management to reduce electricity demand and the need for more power plants.
Many states, as Ms. Kunkel and Mr. Loiter both point out, have a hierarchy of electricity solutions that requires demand management come first, before regulators can consider building new power plants.
And guess what? It works.