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FirstEnergy coal retirements likely part of broader merchant shift, potential sale

's decision toabandon more than 850MW of coal-fired capacity in Ohio, including four units at its 2,210-MWW.H. Sammis coalplant, could be part of a broader strategic shift around its merchant business.

"They'relooking to cut costs and they're looking at shutting down assets,"Guggenheim Securities LLC analyst Shahriar Pourreza said in a July 22 interview.

Similarto American Electric Power Co.Inc.'s recent strategicmoves for its Midwest generation, this change in strategy for FirstEnergy couldeven involve a sale of its competitive segment, according to Pourreza, whorecently met with FirstEnergy management.

Theanalyst said there is a "wide range of options" the company could beexploring.

"Onecould be moving the entire fleet to non-core operations, where it could potentiallyhave some positive ratings impact," Pourreza said. "And it could alsobe putting the fleet under a strategic review for potential monetization."

Theanalyst noted there are a "finite number of buyers" for the businessgiven that the portfolio includes the 908-MW Davis-Besse nuclear plant "that operatesright on top of shale economics."

"So,it's not necessarily the most ideal situation, but there are buyers out therefor these assets," Pourreza said.

FirstEnergyis expected to provide additional visibility on this strategy on its July 29second-quarter earnings call.

Thecompany announced July 22 it will retire units 1-4 at the seven-unit W.H.Sammis coal plant in Stratton, Ohio, in May 2020. The company also plans tosell or deactivate the 136-MW BayShore unit 1 in Oregon, Ohio, by October 2020. The plan todeactivate the five units is the result of challenging market conditions, according to PresidentJim Lash, but will not result in job reductions.

Theproposed plan is subject to PJMInterconnection LLC review for any reliability impacts.

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Economic impact

Pourrezasaid the company's decision to shut down the W.H. Sammis units is "not asurprise" based on the fact that they "generate negative cash flows,they're earnings dilutive and they're very high heat rates."

"Ithink the latest auction prices sort of put the nail in the coffin,"Pourreza added.

Pourrezasaid the retirements likely will not have any long-term negative financialimpact on FirstEnergy.

"Itwouldn't impact their core earnings," Pourreza said. "I think whatinvestors want to see is more of a definitive strategy with the way they'rehandling the merchant generating business. Because if you strip out themerchant generating business, these utilities are solid. They grow very well,they're levered to transmission investments [and] operate in relatively goodregulatory constructs."

FirstEnergy'sstock closed slightly up at $36.51 on July 22.

In aForm 8-K filed July 22 with the SEC, FirstEnergy noted that it will incur approximately$1.51 billion in pretax impairment charges, including coal contract terminationand settlement costs, in the second quarter. The decision also is expected tohave a GAAP EPS impact of $2.99, according to the filing.

S&PGlobal Ratings said its ratings on FirstEnergy and its regulated utilitysubsidiaries are not affected by the pre-tax impairment charge tied to thecompetitive business.

Pourrezasaid the timing of the retirement announcement is "a little bit suspect"given that the Sammis units are part of the ongoing regulatory review of generation incomeguarantees at the Public Utilities Commission of Ohio and .

FirstEnergyspokesman Doug Colafella said the company will not amend the generation hedgein its latest PPA plansince it no longer involves a direct contract between its Ohio utilities andFirstEnergy Solutions Corp.for the output of Sammis and Davis-Besse.

Decision applauded

TheEnvironmental Defense Fund and Sierra Club praised FirstEnergy's decision toretire the coal units, while also noting there are more steps needed in the transitiontoward cleaner energy.

Theagencies have been at the forefront of the battle against for Ohio generation.

"Closingthese outdated, dirty power plants not only shows FirstEnergy finallyrecognizes the market momentum toward coal's inevitable demise, the decision isgreat news for Ohio customers, who avoid paying a massive subsidy to keep theunits afloat," Dick Munson, Midwest director of clean energy for theEnvironmental Defense Fund, said in a written statement.

Whilethe Sierra Club entered into asettlement with AEP tied to its income guarantee for generation, itdid not sign on toFirstEnergy's plan, which included subsidies for Sammis.

"Webelieve these units were uneconomic and having them in the PPA never was theappropriate thing," Daniel Sawmiller, senior campaign representative forthe Sierra Club's Beyond Coal campaign, said in a July 22 interview. "Ithink we finally are getting recognition of that."

Colafellanoted that FirstEnergy has "consistently" stated that the W.H. Sammisand Davis-Besse plants are challenged in the market.

"Ithink from the outset, we made it very clear that those plants were facingeconomic challenges," he said, noting the company also believes Ohio needsa diverse fuel mix.

S&P Global Ratings andS&P Global Market Intelligence are owned by S&P Global Inc.