FirstEnergy Corp today announced a $2.5 billion investment in the company that includes $1.62 billion in mandatory convertible preferred equity and $850 million of common equity. The investment comes from investors including affiliates of Elliott Management Corporation (Elliott), Bluescape, GIC, and Zimmer Partners, LP (Zimmer).

The preferred equity has an initial conversion price of $27.42 per share and will receive dividends payable on FirstEnergy common stock on an as-converted basis and be non-voting, except in limited circumstances. The common equity was issued at a price of $28.22 per share. The proceeds of the private offering will be used to reduce FirstEnergy's holding company debt, contribute to its pension fund, and for general corporate purposes. The investment also will strengthen the company's investment-grade balance sheet, the company said

FirstEnergy previously disclosed that it expected to issue at least $1.5 billion of common equity through 2019, and this investment will satisfy that need in addition to positioning FirstEnergy to better capture incremental utility growth opportunities. As a result, the company does not anticipate the need to issue additional equity through the end of 2020 outside of its stock investment plans and employee benefits programs.

As part of this transaction, FirstEnergy will form a Restructuring Working Group (RWG) to maximize value and certainty to FirstEnergy, while minimizing the timing to exit competitive generation. FirstEnergy has designated three members of the working group: Jim Pearson, executive vice president and chief financial officer; Leila Vespoli, executive vice president of corporate strategy, regulatory affairs and chief legal officer; and Gary Benz, senior vice president of strategy. The RWG's two outside members are industry professionals C. John Wilder, executive chairman of Bluescape, and Anthony (Tony) Horton, chief financial officer and executive vice president of Energy Future Holdings Corp.

"We are pleased that these premier investors are demonstrating confidence in our plan to transform FirstEnergy into a fully regulated utility," said Charles E. Jones, president and chief executive officer of FirstEnergy. "Elliott and Bluescape have proven value-added expertise and investment acumen in power and utility restructurings. This investment will enable us to accelerate FirstEnergy's growth and infrastructure improvement plans for our transmission and distribution business, which will benefit our six million customers."

"This meaningful equity investment and renewed focus on FirstEnergy's substantial regulated investment opportunities across its utility franchise, along with the RWG's laser focus on helping the company exit competitive generation in a constructive and timely manner, will transform FirstEnergy into a premier, high performance pure-play regulated utility," said C. John Wilder of Bluescape. "I am extremely excited to work with the RWG to transform FirstEnergy and I believe there is substantial opportunity to increase value for all stakeholders and to greatly accelerate FirstEnergy's repositioning to a high performance regulated utility."

"I want to thank Chuck and his team for working constructively with Elliott on today's announced investment," said Jeff Rosenbaum, portfolio manager at Elliott. "We are supportive of FirstEnergy's transition to a pure-play collection of pristine, fully regulated utility companies. We believe a strengthened balance sheet, coupled with the creation of the RWG, will assist in navigating this transition and lead to tremendous value creation and certainty for FirstEnergy shareholders."

FirstEnergy also further detailed the investment and strategy in a letter to investors, as reproduced below:

TO THE INVESTMENT COMMUNITY:

FirstEnergy Corp. Announces Transformational $2.5 Billion Equity Investment
Strengthens Balance Sheet and Supports Transition to Fully Regulated Utility Company
Reaffirms 5% to 7% Regulated Operating EPS Growth Target through 2019

On January 22, 2018, FirstEnergy Corp. (FE) announced a transformational $2.5 billion equity investment from prominent investors, including affiliates of Elliott Management Corporation (Elliott), Bluescape, GIC, and Zimmer Partners, LP (Zimmer).  This landmark investment will serve as an important step toward unlocking the full value of FE for all shareholders:

• New Equity Investment
  • Significantly Delevers FirstEnergy, Strengthening FE Balance Sheet and Enhancing Investment Grade Credit Metrics
  • Satisfies Near-Term Equity Needs
• Creation of Restructuring Working Group (RWG)
  • RWG to Include C. John Wilder, Tony Horton and Three FE Representatives to Advise FE on Strategy to Exit Competitive Generation
  • Shifts Focus to Constructive Resolution Involving Maximizing Value, Certainty and Timing for all Stakeholders
• Full Focus on Core Regulated Utility Business
  • Shifts Investor Paradigm from Hybrid to Pure-Play Regulated Utility
  • Enhanced Focus on Substantial Growth Investment Opportunities Across Regulated Businesses
  • Utilizes FE's Strengthened Balance Sheet for Regulated Distribution and Transmission Utilities to Deliver Top Decile Reliability, Safety and Operational Excellence
  • Reaffirms Regulated Operating EPS Growth Target of 5% to 7% -- 8% to 10% Including the Ohio Distribution Modernization Rider (DMR) -- through 2019

Increased Financial Flexibility

This equity investment allows FE to significantly strengthen its balance sheet and supports the company's transition to a fully regulated company.  By deleveraging the company, this investment will also enable FE to enhance its investment grade credit metrics and eliminate the need to issue incremental equity though at least year-end 2020, excluding approximately $100 million annually for its stock investment and employee benefits plans. 

The $2.5 billion investment includes $1.62 billion in mandatorily convertible preferred equity with an initial conversion price of $27.42 per share and $850 million of common equity issued at $28.22 per share. The preferred shares will receive the same dividend paid on FE common stock on an as-converted basis and are non-voting except in certain limited circumstances. The new preferred shares contain an optional conversion for holders beginning in six months, and will mandatorily convert in 18 months, subject to a limited exception. Elliott, Bluescape and GIC are preferred equity investors.  Zimmer is the common equity investor.

Proceeds from the investment will be used to reduce FE holding company debt by $1.45 billion, fund FE's pension by $750 million, with the remainder used for general corporate purposes.  This transformational investment significantly strengthens FE's balance sheet and enhances its credit metrics. 

On January 5, 2018, FE made a $500 million contribution to its pension plan.  The additional $750 million contribution results in no required contributions in 2019 and 2020, and FE estimates a 2021 contribution of approximately $80 million.  The $1.25 billion 2018 pension contributions will result in lower pension expense beginning in 2018.

FE previously disclosed it expected to issue at least $1.5 billion of common equity through 2019, and this investment fulfills that expectation. As a result, FE does not anticipate the need to issue additional equity through at least the end of 2020 outside of its regular stock investment and employee benefit plans. FE is also reaffirming its 5% to 7% regulated operating EPS growth target (8% to 10% including the Ohio DMR) through 2019 from the 2016 base year regulated operating EPS of $2.46 per share.*

This transaction positions FE for sustained investment grade credit metrics, including potential impacts from the Federal Tax Cuts and Jobs Act.  Although subject to FE Board approval, FE expects to maintain a competitive dividend at the current level of $1.44 per share.  Pro-forma as of December 31, 2017 for these equity investments, FE expects to have 534 million shares outstanding on a fully diluted basis.

* Compound Annual Growth Rate using 2016 operating earnings (non-GAAP) for Regulated Distribution of $1.81 per share and Regulated Transmission of $0.78 per share, with an adjustment of ($0.13) per share for the impact of weather. See page 4 for reconciliation between GAAP and Operating (non-GAAP) earnings. Mid-point of 5% to 7% growth rate assumes preferred equity converts on the mandatory conversion date in July 2019.

Creation of Restructuring Working Group

As part of this transaction FE will form a RWG to maximize value and certainty to FE, while minimizing the timing to full resolution for all stakeholders.  FE has designated three members of the working group:  Jim Pearson, executive vice president and chief financial officer; Leila Vespoli, executive vice president, corporate strategy, regulatory affairs and chief legal officer; and Gary Benz, senior vice president of strategy.  The RWG's two outside members are industry professionals C. John Wilder, executive chairman of Bluescape, and Anthony (Tony) Horton, chief financial officer and executive vice president of Energy Future Holdings Corp.  The RWG will advise company management regarding a rapid and constructive restructuring of FirstEnergy Solutions (FES) in the event the FES Board decides to seek bankruptcy protection.  

Focus on Regulated Businesses

Importantly, these equity investments and formation of the RWG underscore the significant opportunity in FE's regulated growth strategy, support FE Board and senior management focus on growth in the regulated distribution and transmission businesses, and reposition FE as a premier, high-growth, pure-play regulated utility.  The transaction positions FE for additional future investments across its utility footprint, including near-term opportunities for grid modernization in Ohio and infrastructure improvement in New Jersey, which would translate into incremental EPS growth.  A crisp focus on capital allocation to the regulated utilities is expected to provide meaningful benefits to FE's six million customers, shareholders and other stakeholders.