What happened

Shares of electric utility FirstEnergy (NYSE:FE) fell a dramatic 17.5% at the open of trading on Wednesday. The company put out three news releases on Tuesday. But the shortest one (amounting to a couple of sentences), released after the market had closed for the day, was the reason for the sharp price drop today.

So what

The initial FirstEnergy news release was about preparing customers for summer heat, not particularly unusual for a utility. The second was about the company maintaining the dividend at its current level (not bad news, though a dividend hike would have been better).

The third and final news release, issued at 4:17 p.m. EDT, said only: "This afternoon, FirstEnergy Corp. (NYSE: 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."  

A man holding his head with a candlestick chart heading lower behind him

Image source: Getty Images.

The bill in question relaxed renewable energy standards and offered what have been described as "bailouts" to a number of utilities, including FirstEnergy, which formerly owned two older nuclear power plants in the state. The problem is that there are accusations of bribery involved in the passage of the bill, with some suggesting illicit payments may have gone as high as $60 million. Key Ohio politicians have already been arrested.

This issue is clearly much bigger than FirstEnergy, but getting ensnared in the controversy, and potential legal cases, is not good news for the utility. Investors reacted accordingly.  

Now what

Shareholders need to revisit their FirstEnergy positions. The actual risks here are uncertain at this point. But it is very clear that FirstEnergy is dealing with a potentially serious and lengthy problem. Risk-averse investors might want to stay on the sidelines until there's more clarity.