Slow Start for FirstEnergy Bond Sale

CHICAGO - Of the five pollution-control refunding bond issues marketed last week for Ohio-based FirstEnergy Corp., only three smaller-sized issues totaling $81 million were priced, while two larger issues totaling $100 million failed to sell.

The investor-owned utility, one of the largest in the U.S., said it would try again to refund the revenue bonds when "market conditions improve."

Acting through the Ohio Air Quality Development Authority, the Ohio Water Development Authority, and Pennsylvania's Beaver County Industrial Development Authority, FirstEnergy last Thursday attempted to price five refunding revenue bond series totaling $181 million.

Banc of America Securities LLC and Blaylock Robert Van LLC acted as underwriters on the transactions.

Three of the five series were issued through the Ohio Air Quality Development Authority, and of those the finance team managed to sell only one, for $23 million. The two remaining $50 million series failed to price. At the same time, the Ohio water authority successfully priced a $33 million issue and the Beaver County authority priced a $25 million issue.

The finance team had warned that recent market volatility could make the bonds difficult to price, said Mark Shanahan, executive director of Ohio Air Quality Development Authority. "They were always clear with us that they would attempt to issue all three [for OAQDA] but that it would depend on market conditions."

All five bond series had similar structures, he added. The series that were sold through the Ohio issuers featured tender dates in 2012 and final maturities in 2032. Those that sold captured a 7.25% interest rate. The $25 million Beaver County issue featured a 2011 tender date and a 2028 final maturity. Those bonds captured a 7.125% interest rate, according to Thomson Reuters. All the bonds that sold were subject to the alternative minimum tax and none were bank-qualified.

Moody's Investors Service rated the bonds Baa2 and Standard & Poor's rated the debt BBB.

The bonds that sold were issued on behalf of subsidiary FirstEnergy Nuclear Generation Corp. The bonds that did not sell were issued on behalf of a separate subsidiary, FirstEnergy Generation Corp., which governs FirstEnergy's fossil fuel business.

"This is the first time that we've had somebody fail to price," said Shanahan. "I can't remember anybody running into that, but I can't remember market conditions like this either."

A number of utilities that had planned to sell bonds through the authority have either postponed their sales or are considering postponing them, he said.

"We have a number of other utilities trying to go to market and are just having a problem," Shanahan said. "I think it's the nature of the market - they're power bonds, and traditionally that's been a solid investment, but these market conditions are such that they can't predict."

FirstEnergy spokesman Mark Durbin blamed the "state of the tax-exempt pollution control bond market" for the two series that remained unsold. The utility would try to price the remaining $100 million in the future when market conditions improve, he said.

The refundings were part of a larger effort by FirstEnergy Corp. to restructure its debt, as required under Ohio's revised utility regulations. In 2000, the state deregulated its energy market, and required utilities to separate generation which was deregulated from transmission and distribution, which remain regulated.

As part of its effort to comply with state regulations, FirstEnergy restructured at least 10 outstanding debt issues. At the time, the restructuring was one of the most drastic done by a power utility in the state in accordance with the regulation, said officials.

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