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FirstEnergy to Shed Hydro Assets

Zacks Equity Research

FirstEnergy Corp. (FE) subsidiaries are seeking approval from the Federal Energy Regulatory Commission ("FERC") for the sale of 11 hydroelectric power facilities located in Pennsylvania, Virginia and West Virginia. The company inked an agreement on Aug 23 to sell the assets to Harbor Hydro Holdings, LLC, an ancillary of LS Power Equity Partners II, LP.

The deal is subject to customary closing conditions, which include the FERC, the Commonwealth of Virginia's State Corporation Commission and various other sanctions. The proposed sale is anticipated to conclude in the fourth quarter of 2013.

FirstEnergy was exploring options to sell its unregulated hydro assets since Feb 2013. The purpose behind the asset divestment is to alleviate the company’s rising debt level, which at the end of Jun 30, 2013 stood at $15.4 billion. The company hasn’t yet divulged the overall value of this transaction.

The divestiture list includes the sale of the 451 megawatt (MW) Seneca Pumped Storage in Warren, Pa.; the 6 MW Allegheny Lock & Dam 5 in Schenley, Pa.; the 7 MW Allegheny Lock & Dam 6 in Ford City, Pa. and the 52 MW Lake Lynn station in Lake Lynn, Pa. The completion of the sale is also contingent upon the settlement of a potential competing license application and other claims associated with the Seneca facility.

The West Virginia and Virginia properties include the 3 MW Millville facility, the 2 MW Dam 4 in Shepherdstown, the 1.2 MW Dam 5 in Falling Waters and the 750 kilowatt (kW) Warren station in Front Royal as well as the 1.6 MW station in Luray. Also included are the 860 kW and 1.4 MW Shenandoah and Newport complexes, respectively, in Shenandoah, Va. This translates to an aggregate capacity of 527 MW which is less than 3% of FirstEnergy’s total generation portfolio.

However, FirstEnergy’s subsidiary Allegheny Generating Company will retain ownership of 1,200 MW of the 3,000 MW Bath County Hydro facility in Warm Springs, Va. while Jersey Central & Light will hold on to 200 MW of the 400 MW Yards Creek station in Blairstown, N.J.

FirstEnergy is looking to streamline its operations to boost near-term growth opportunities. With hydro renewables gradually losing the race to wind, FirstEnergy’s divestiture looks well timed. Consumption from this particular energy is expected to decline 4.2% in 2013 compared to non-hydro sources, as per the Energy Information Administration.

FirstEnergy presently holds a Zacks Rank #3 (Hold). Other utility operators better placed in the market are Zacks Ranked #2 (Buy) UNS Energy Corp. (UNS), IdaCorp Inc. (IDA) and PNM Resources Inc. (PNM).

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