Shares of FirstEnergy soar after embattled utility gets investment from activist Elliott Management

Key Points
  • FirstEnergy announced a $2.5 billion investment from Elliott Management and other investors.
  • The embattled utility is trying to pay down debt tied to its segment operating power plants and exit that business.
  • The deal includes the formation of a working group to expedite FirstEnergy's transition into a company that primarily operates transmission and distribution lines, a safe business with a regulated rate of return.
Signage is displayed at the FirstEnergy Corp. Bruce Mansfield coal-fired power plant in Shippingport, Pennsylvania.
Justin Merriman | Bloomberg | Getty Images

FirstEnergy's stock price soared on Monday after the embattled utility announced an investment from well-known investors that will help underwrite its planned business transformation.

Shares of FirstEnergy were up more than 12 percent at roughly $33 on news of the $2.5 billion equity investment, which the company called "transformational."

The investment comes from activist investor Paul Singer's Elliot Management and Bluescape Energy Partners, a private investment firm run by Charles John Wilder, the utility industry heavyweight known for turning around TXU Corporation and orchestrating the biggest leveraged buyout in history.

Elliott and Bluescape, along with Singapore sovereign wealth fund GIC and Zimmer Partners, are investing $1.62 billion in mandatory convertible common stock and $850 million of common equity. FirstEnergy says it will use the proceeds to pay down $1.45 billion in debt and cover $750 million in pension obligations.

The deal includes the formation of a panel tasked with restructuring FirstEnergy's business structure, which will include Wilder. The goal is to transition FirstEnergy to a company focused on operating the infrastructure that transmits and distributes electric power from plants to homes and businesses.

Transmission and distribution is regulated by state authorities and guarantees a relatively stable rate of return.

"We are pleased that these premier investors are demonstrating confidence in our plan to transform FirstEnergy into a fully regulated utility," Charles E. Jones, president and CEO of FirstEnergy said in a statement. "Elliott and Bluescape have proven value-added expertise and investment acumen in power and utility restructurings."

FirstEnergy announced plans more than a year ago to exit the competitive power generation business, which is controlled by its subsidiary, FirstEnergy Solutions. The segment, which generates electricity at power plants and sells it into wholesale markets, has come under pressure from falling natural gas prices, a surge in renewable energy and generally weak power prices.

Here's a historical look at how utilities and energy perform right after the new year
Here's a historical look at how utilities and energy perform right after the new year

FirstEnergy Solutions operates a number of coal, nuclear and natural gas plants in states including Ohio, Pennsylvania and New Jersey, a region that underwent utility deregulation in the early 2000s.

In these free markets, regulators don't guarantee a rate of return to power suppliers. So-called merchant generators like FirstEnergy Solutions have struggled to find a winning business model.

Elliott Management and Bluescape are also involved in the transformation plan of another regional merchant generator, NRG Energy.

It remains unclear exactly how FirstEnergy will deal with its unwanted assets. Some of the options include declaring bankruptcy for FirstEnergy Solutions or arranging a restructuring or sale.