FirstEnergy Unit's Bankruptcy A Bigger Catalyst Than It Seemed?


Electric utility FirstEnergy Corp. FE's First Energy Solutions, or FES, subsidiary is on the verge of filing for bankruptcy.

Against this backdrop, Evercore ISI upgraded shares of FirstEnergy on its view that bankruptcy implications for its FES subsidiary is more palatable than its previous assessment. As such, the firm upgraded FirstEnergy from In Line to Outperform and also increased its price target from $30 to $35.

Analysts Greg Gordon and Kevin Prior said FirstEnergy's financial exposure to an FES bankruptcy could be less than the $1.2 billion they were expecting in May, when they downgraded shares from Outperform to In Line. The analysts added they're now more comfortable regarding some of those financial exposures, like a theoretical obligation to fund dry cask storage for FES' nuke plants.

See Also: A Neutral View On A Big Utilities ETF

At least, Evercore ISI believes much of the financial exposures it was fearing is being discounted in the stock price. The firm sees the recent engagement with FES bondholders as stimulating a potentially faster resolution of uncertainty than it feared.

"A settlement would be a constructive direction for FE pursue as it exits the competitive business and focuses its on becoming a purely regulated utility holding company," the firm said.

In hindsight, the analysts now feels its May downgrade was ill timed. Since then, the stock has outperformed, as the market began to price in some of the developments. However, in the year-to-date period, the stock's performance lags the regulated peers.

Thus, Evercore noted that FirstEnergy is still at a meaningful discount on a relative P/E basis, if its risk-adjusted earnings estimates prove realistic.

As such, the firm raised its estimates for FirstEnergy to reflect slightly better utility earning power and a lower base case equity issuance assumption. The firm attributed its upward adjustment of price target to its increased earnings per share forecast, a potentially cleaner and quicker path to FirstEnergy extricating from the competitive business.

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