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CreditSights says Wall Street 'ignoring' obstacle to FirstEnergy Solutions sale

CreditSights weighed in on the debate about the future ofFirstEnergy Corp.'sgeneration business, with analysts opining that the company is "incrediblyunlikely" to sellor spin

"Any potential sale or spinoff has incredibly highhurdles and we see zero buyers for a partial IPO of the unit and we cannotimagine [FirstEnergy] shareholders, likely low risk tolerance income funds& retail investors, want to receive individual shares in [FirstEnergySolutions] via a spinoff," CreditSights analysts wrote in a Sept. 30report.

FirstEnergy President and CEO Charles Jones Jr. said in Julythat the company will look at "allalternatives" for its competitive business, including the saleor deactivation of additionalunits, in response to challengingconditions in the PJMInterconnection LLC market.

CreditSights, however, said FirstEnergy Solutions' longbonds have fallen about 40 points since Jones said the parent company "[does]not intend to infuse additional equity into our competitive business in orderto support credit ratings."

The firm said FirstEnergy has an unfunded pension balance of$2.2 billion at FirstEnergy Solutions, while noting that the company hasguaranteed $1.2 billion of unfunded pension obligations at the competitivesubsidiary.

"The pension issue … is a strong obstacle to one of the[independent power producers] or private equity firms taking over the fleet inorder to get the option value of a potential recovery in natural gas prices,power prices and/or capacity prices in PJM," analysts wrote. "Thestreet research we've seen seems to be ignoring this large pension obstacle toa sale."

CreditSights contends there is a potential situation whereFirstEnergy could follow AmerenCorp.'s example in the 2013 sale of its merchant business to "and pays somebody totake [FirstEnergy Solutions]."

"We could see a similar pay-to-take situation playoutfor [FirstEnergy] and [FirstEnergy Solutions] but we aren't going to speculateon how much [FirstEnergy] would have to pay a third party to take the fleet andthe unfunded pension obligation that parent hasn't explicitly agreed to assume,"analysts wrote.

CreditSights also noted that recent events "havecrystallized incredibly weak values for PJM coal plants and nukes in general."

Specific examples include American Electric Power Co. Inc.'s pending of assets to two privateequity firms and bidsranging from $230 million to $535 million in implied total enterprise value forHomer City Generation LP's1,907-MW Homer Cityin Indiana County, Pa.

Recent coal and nuclear asset sales imply an approximately$811 million value on FirstEnergy Solutions' portfolio versus $3 billion ofdebt outstanding, according to CreditSights.

Analysts break down this valuation at a $100/kW value onmore than 3,900 MW of coal plants, a $400/kW value on the simple-cycleWest Lorain gasplant and a $50/kW value on more than 4,000 MW of nuclear generation.