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Evercore upgrades FirstEnergy to 'outperform'

Evercore ISI on Aug. 14 upgraded FirstEnergy Corp. to "outperform" from "in line" and raised the Ohio utility's price target to $35 from $30.

The firm's action comes after new details emerged around FirstEnergy's financial exposure to a potential bankruptcy for competitive subsidiary FirstEnergy Solutions Corp., or FES, and just a few months after the stock was downgraded. "We thought the exposure might be significantly in excess of the [$1.2 billion] they were then articulating, and the time horizon for resolving said uncertainty could be long-dated," Evercore analyst Greg Gordon wrote in an Aug. 14 research report.

"We are now more comfortable regarding some of those financial exposures, like a theoretical obligation to fund dry cask storage for FES's nuke plants, or at least concede that a large number is currently discounted in the share price," Gordon added. "We also view recent engagement with FES bondholders as stimulating a potentially faster resolution of uncertainty than we then feared. In fact, our downgrade was ill timed."

The analyst noted that the stock has outperformed since the downgrade and has begun to "price in" some of the aforementioned developments. FirstEnergy stock closed up 0.96% at $32.48 in below-average trading Aug. 14.

FirstEnergy management said on a July 28 earnings call that they planned to meet with FES creditors the week of July 31 as the independent board of directors at FES weighs debt restructuring and potential bankruptcy. "I think it is clearly the preferred route if we end up in a bankruptcy proceeding with FES to do it through a structured settlement that all parties are comfortable with," FirstEnergy President and CEO Charles Jones Jr. said on the call.

"A settlement would be a constructive direction for [FirstEnergy to] pursue as it exits the competitive business and focuses its [efforts] on becoming a purely regulated utility holding company," Gordon wrote.

No further details around the meeting with FES creditors have been released.