FirstEnergy Gets $2.5 Billion Investment

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Electric utility FirstEnergy Corp. (NYSE: FE) announced Monday morning that it is receiving a $2.5 billion equity investment from affiliates of Paul Singer’s Elliott Management, Bluescape, GIC and Zimmer Partners. The investment will be used to reduce debt and contribute to its pension fund, and for general corporate purposes, according to the announcement.

The investment comprises $1.62 in mandatory convertible preferred equity and $850 million in common equity. The preferred equity has a conversion price of $27.42 per share and will receive dividends payable on the company’s common stock on an as-converted basis. The preferred equity has no voting rights except in limited circumstances.

The issue price of the common stock is $28.22 per share. FirstEnergy’s common stock closed at $29.40 on Friday.

FirstEnergy had planned to issue at least $1.5 billion in common stock through 2019 but does not now see a need to issue additional equity through the end of 2020. The company’s CEO, Charles E. Jones said:

We are pleased that these premier investors are demonstrating confidence in our plan to transform FirstEnergy into a fully regulated utility. 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.

FirstEnergy is transitioning to a pure-play collection of regulated utility companies. To support that transition, the company will create a Restructuring Working Group with three members appointed by the company and two from outside the firm, one from Bluescape and the other from Energy Future Holdings.

Elliott Management is a hedge fund run by Paul Singer, Bluescape is a private equity firm and GIC is Singapore’s sovereign wealth fund. These three combined to acquire the preferred shares. Zimmer Partners is a registered investment advisory firm and is the sole purchase of the common equity included in the transaction.

Proceeds from the investment will be used to reduce FirstEnergy’s outstanding debt by $1.45 billion and to add $750 million to the company’s pension fund.

The company expects to maintain its current annual dividend of $1.44 per share and is also reaffirming its 5% to 7% regulated operating earnings per share (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.

FirstEnergy shares soared by more than 15% Monday morning to $34.00, in a 52-week range of $17.93 to $35.22. The 12-month consensus price target on the stock was $35.17 before this morning’s announcement.