FE - First Energy

[Spekulatius]

This is a utility with a long history of subpar management, but they recently outdid themselves with a scandal involving the spinoff of some nuclear power plants which subsequently went bankrupt suspiciously fast. There was apparently bribery involved to get the deal done and while I am uncertain on the details, the CEO and the legal counsel have been fired.

 

I stated tracking this stock again after the scandal came to light and the stock tanked. The business itself are mostly regulated power transmission and distribution assets in reasonably friendly (as far as regulators are concerned) areas, except maybe New Jersey.

 

I was reading though the last 10-q and what caught my eye was a list of the recent credit ratings. I read thwt FE was downgraded due to above mishaps before, but I was surprised to se that not just the holding co, but also the subs have been downgraded into junk - BB+ By S&P, while Fitch and Moody‘s have them still at BBB- or even BBB. A 2 Notch divergence is unusual, and I wonder what happens if the other credit rating cos join S&P and downgrade FE to junk. Typically regulators don’t like a regulated utility becoming junk credit, so I think this could quickly force and equity raise to counter a credit downgrade.

 

That’s my thinking - I would like to buy this at distressed valuation (see PGE or EIX lately) but I am wary of stepping in front of a possible equity raise.

https://www.sec.gov/ix?doc=/Archives/edgar/data/1031296/000103129620000045/fe-20200930.htm

[JRM]

Why wouldn't they just cut (or reduce) the dividend first?

[rb]

It's trading at 2 times book. Why would you buy a distressed utility at 2 times book? Unless I'm missing something.

[Spekulatius]

Why wouldn't they just cut (or reduce) the dividend first?

 

They might well  do both - raise capital and reduce the dividend. Book value is not the right way to look at an utility - the regulated asset base is a better metric in connection with credit metrics (debt/ EBITDA).

[Spekulatius]

This doesn’t sound very good either - regulator stepping down. Regulatory capture taken a bit too far, I,o:

https://finance.yahoo.com/news/top-ohio-utility-regulator-resigns-164518938.html

 

Fitch also downgraded FE to junk apparently. This makes a dividend cut and/or capital raise more likely, imo.