- S&P Global Ratings and Moody's downgraded FirstEnergy's credit rating to 'junk' status on Tuesday after the company tapped into its existing revolving credit lines backed by a consortium of large banks.
- Fitch downgraded its FirstEnergy ratings a week ago following the company's third quarter earnings report detailing why it had earlier fired its CEO and four other top executives in the wake of an ongoing federal political corruption probe.
- The downgrades came just hours before a federal judge handling the bankruptcy of former FirstEnergy subsidiary FirstEnergy Solutions (FES) refused to allow final payments to the law firm handling the case until four of its top lawyers explained their involvement, if any, in lobbying efforts to pass legislation providing up to $1.3 billion to subsidize operations of FirstEnergy's former nuclear plants.
In an 8-K filed with the U.S. Securities and Exchange Commission (SEC) Tuesday, the company said certain of its distribution and transmission companies tapped into the revolving credit facility "as a proactive measure to increase their respective cash positions and preserve financial flexibility. "
The distribution companies borrowed $950 million under the revolving loan fund, leaving $1.3 billion available for future borrowing, if necessary. The transmission companies borrowed $1 billion, the total amount available.
FirstEnergy declined to comment.
The decision to tap the credit lines does not reflect the healthy revenue stream and profitability the company reported for the third quarter. The company said it earned $454 million, or 84 cents per share, on revenues of $3 billion for the quarter. That compares to $391 million, or 72 cents per share on revenues of $3 billion in the third quarter of 2019.
Instead, it appears directly related to the potential ratings impact of the ongoing Justice Department probe into how Ohio's former Speaker of the House, backed by nearly $61 million in corporate funding, managed to allegedly persuade other legislators into supporting a $1.3 billion bailout of FirstEnergy's former nuclear power plants. FirstEnergy had sought a bailout for five years before the passage of House Bill 6 in 2019.
The federal probe into alleged political corruption — to which a political consultant and a lobbyist have already pled guilty — and FirstEnergy's potential fine for its alleged role in that corruption — earlier this week prompted Samuel Randazzo, the chairman of the Public Utilities Commission of Ohio, to abruptly resign. The probe also has led FirstEnergy's board of directors to launch an internal examination of the corporate culture, whether its code of conduct is adequate and whether employees are following it.
In its detailed third quarter 10-Q filed with the SEC on Nov. 19, weeks after the earnings were informally announced, the board of directors explained that it fired former CEO Charles Jones for violating certain provisions of the code of conduct.
The board also fired four other top executives and announced that its internal investigation is still underway. And it revealed the top executives had approved payment of about $4 million in early 2019 to terminate a six-year consulting contract with a company believed to be owned by Randazzo, who was appointed chair of the PUCO in February 2019.
S&P said the downgrade was necessary, given the situation in which the company finds itself.
"Although we believe the company's decision to significantly increase its borrowings under its revolving credit facility demonstrates prudent risk management given the unique challenges the company is facing, in our view, it is also an acknowledgement that the company may not have consistent access to the capital markets," S&P explained in a release.
"As part of FE's ongoing investigations, the company identified a material weakness in its internal controls over financial reporting. The company acknowledged it did not maintain an effective control environment. Specifically, the company's senior management failed to reinforce the need for compliance with the company's policies and code of conduct, which resulted in inappropriate conduct." S&P continued.
While FirstEnergy is facing credit downgrades and investigations, its former power plant subsidiary, FES, is facing its own set of challenges.
Although FES emerged from bankruptcy protection in February 2020 as Energy Harbor, the bankruptcy court has held up its approval of final payments to the national law firm Akin Gump, in part because Judge Alan Koschik did not want the court's actions to interfere with the ongoing federal probe. The firm has billed FES $60 million, most of which the court has allowed on an interim basis, while holding up final payments as the Justice Department probe continues.
Koschik late Tuesday issued an order demanding that four Akin Gump attorneys explain their involvement, if any, in the scheme allegedly developed by the former Ohio Speaker of the House. The four have until Jan. 8 to submit sworn statements in answer to about a dozen questions from Koschik. State records show that at least one of the four registered as an FES lobbyist in 2018 and 2019.
Akin Gump Wednesday said it had no comment.