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Spread x5 in Two Sessions: FirstEnergy

30 October 2020 by jbchevrel

US electric utility FirstEnergy (FE) CDS went from 20bp to more than 100bp in 2 sessions basically (July 22 and today). Back in July, the FE CDS premium tripled in one day from 20bp to 60bp. FE posted 3 press releases, back then. The 1st one was about preparing customers for summer heat, the 2nd was about the company maintaining its dividend, the 3rd one said: "This afternoon, FE received subpoenas in connection with the investigation surrounding Ohio House Bill 6. We are reviewing the details of the investigation and we intend to fully cooperate." There are accusations of bribery involved in the passage of the bill, with some suggesting illicit payments may have gone as high as $60M. Some Ohio were arrested, including Larry Householder (powerful figure of the Republican Party and Ohio’s House Speaker). This week, FE fired CEO Jones and other senior executives (senior VP of product development, marketing, and branding & senior VP of external affairs) after a board review set up in the wake of a federal corruption scandal found they violated the company’s policies and its code of conduct. The Akron, Ohio-based utility appointed President Steven Strah acting CEO, effective immediately. And today the CDS widened from 70bp to 104bp. This CDS had been very tight (stable cash flow, reasonable dividend). In 2019, FE increased its cash reserves by c60%, or $250M. They operationally generated +$2.47B, generated +$656M from financing, and invested -$2.87B. Over the 5y period ending 2019, FE added an average +$120M cash per year. Cash reserves ended 2019 roughly $630M. Here, it is hard to predict what sort of financial penalty the company is risking.