8-KRegulation FDOther Events

FIRSTENERGY CORP 8-K Report, Regulation FD Disclosure (Aug 3, 2016)

Filed August 3, 2016For Securities:FE

Summary

This 8-K filing by FirstEnergy Corp. (FE) primarily discloses credit rating downgrades for its subsidiary FirstEnergy Solutions Corp. (FES) by Moody's and S&P, and details reoffering agreements for approximately $470.9 million in tax-exempt pollution control revenue refunding bonds (PCRBs) issued by FES and its subsidiaries, FirstEnergy Generation, LLC (FG) and FirstEnergy Nuclear Generation, LLC (NG). Moody's downgraded FES's senior unsecured rating to 'Ba2' and maintained a negative outlook. S&P lowered FES's corporate credit rating to 'BB-' with a stable outlook, while reaffirming FirstEnergy Corp. and its regulated subsidiaries' 'BBB-' issuer credit ratings with a negative outlook. The reoffering agreements with J.P. Morgan Securities LLC involve eight series of PCRBs, with J.P. Morgan obligated to purchase these bonds regardless of their ability to reoffer them. These bonds are secured by first mortgage bonds of FG or NG. This filing is critical for investors to understand the increased financial pressure and potential risks associated with FES, while also noting the stable outlook for the parent company and its regulated operations. The information regarding the PCRBs provides detail on upcoming debt obligations and their security, which will impact the capital structure of FG and NG.

Key Highlights

  • 1Moody's downgraded FirstEnergy Solutions Corp. (FES) senior unsecured rating to 'Ba2' (from 'Baa3') with a negative outlook.
  • 2S&P lowered FES's corporate credit rating to 'BB-' (from 'BBB-') with a stable outlook.
  • 3S&P reaffirmed FirstEnergy Corp. and its regulated subsidiaries' 'BBB-' issuer credit ratings with a negative outlook.
  • 4FES and its subsidiaries (FG, NG) entered agreements to reoffer approximately $470.9 million in tax-exempt pollution control revenue refunding bonds (PCRBs).
  • 5J.P. Morgan Securities LLC is obligated to purchase these PCRBs, irrespective of its ability to reoffer them.
  • 6The PCRBs are secured by first mortgage bonds issued by FG or NG.
  • 7Debt obligations of FES, FG, and NG are generally cross-guaranteed, meaning holders of debt from any of these entities have claims against all three.

Frequently Asked Questions

The downgrades by Moody's and S&P indicate an increased risk associated with FirstEnergy Solutions Corp.'s ability to meet its debt obligations. This could lead to higher borrowing costs for FES and potentially impact its operational flexibility and financial stability. Investors should monitor FES's financial health closely, as its performance can affect the broader FirstEnergy Corp. group.

These are tax-exempt bonds issued by various county and state authorities (BCIDA, OAQDA, OWDA, PEDFA) on behalf of FES and its subsidiaries FG and NG. They are being refinanced and reoffered by J.P. Morgan. The total principal amount is approximately $470.9 million and they are secured by first mortgage bonds of FG or NG. Their primary purpose is typically to finance pollution control facilities for power generation.

J.P. Morgan's commitment to purchase the PCRBs on the settlement date, regardless of whether they can successfully reoffer them to other investors, provides certainty of funding for FES and its subsidiaries for this specific debt issuance. This arrangement mitigates the risk for FES that market conditions might prevent the sale of the bonds.

FirstEnergy Corp. and its regulated utility subsidiaries received a 'BBB-' issuer credit rating with a negative outlook. This rating reflects the perceived stability of their regulated operations. In contrast, FES, which operates in competitive wholesale energy markets, received lower ratings ('Ba2' from Moody's, 'BB-' from S&P) and a negative outlook (from Moody's). This distinction highlights the higher financial risk associated with FES's non-regulated business compared to FirstEnergy Corp.'s core regulated utility operations.