BAML Call on FirstEnergy Solutions Corp. and GenOn Energy, Inc.

Conference Call on FirstEnergy Solutions Corp. and GenOn Energy, Inc.

Call to be Hosted by Bank of America Merrill Lynch
US Power, Utilities & Alt Energy Research

WEDNESDAY, NOVEMBER 1, 2017, 2:30 P.M., Eastern Daylight/New York City Time

Participant Dial In:

Toll Free 800-949-2165
Local +1 323-794-2557
Confirmation Code 8836760

PREPARED REMARKS OF TIMOTHY M. TOY

During 2016, I had the pleasure of speaking about lease issues embedded in the capital
structures of FirstEnergy Solutions Corp. (FES), the company which is the predominate part of the
competitive energy supply segment of FirstEnergy Corp. (FE), and GenOn Energy, Inc. (GenOn).
In addition, I launched a lease-focused open-access source book for each of FES and GenOn.

--For the FES presentation and a transcript of my FES remarks, please click here
(presentation) and here (transcript). The FES source book is www.fessourcebook.com.

--For the GenOn presentation and a transcript of my GenOn remarks, please click here
(presentation) and here (transcript). The FES source book is www.genonsourcebook.com.

I updated the FES source book as I prepared today’s remarks, but I have not updated the
GenOn source book. I have included in the FES source book items related to the pending GenOn
plan of reorganization. Please click here for the updated index to the FES source book.
My remarks are in three areas:
--Recent FES disclosures.
--A chapter 11 plan of reorganization for GenOn is presently in the creditor approval
process. Most notably from the lease perspective, the GenOn chapter 11 reorganization
proceedings have excluded the Morgantown and Dickerson plant lessee, GenOn Mid-

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Atlantic, LLC (called GenMa in the plan; historically called MIRMA) and the Keystone,
Conemaugh and Shawville lessee (called REMA, both in the plan and historically).
--At the end of December 2016, the Bankruptcy Court for the Southern District of New
York issued an opinion in the “lien avoidance” adversary proceeding pending as part of
the Motors Liquidation Company. The court’s opinion will play a substantial role in any
attempt by a reorganizing FES, GenMa and/or REMA to limit lease rejection damage
claims pursuant to section 502(b)(6) of the Bankruptcy Code.

My remarks are not made on behalf of, or to further a position held by, a client. I have not
received compensation or cost reimbursement for my GenOn and FES analyses.

Contents
I. The Pass Through Certificates (PTCs) ......................................................................................................... 2
II. Meaning of October 26, 2017 Disclosure by FES ...................................................................................... 3
II.1 Pollution Control Revenue (Refunding) Bonds (PCRBs) ...................................................................... 3
II.2 $700 Million FE Secured Credit Agreement ........................................................................................ 4
II.3 Parental Support for Nuclear Operations ........................................................................................... 4
II.4 Meaning of October 26, 2017 Disclosure by FES ................................................................................ 5
III. The Pending GenOn Plan of Reorganization ............................................................................................ 5
III.1 Who is Covered by the Debtors Plan? ............................................................................................... 6
III.2 The Exclusion of GenMa and REMA ................................................................................................... 6
III.3 Is PTC Acquiescence/Silence Warranted?.......................................................................................... 7
IV. The Motors Liquidation ........................................................................................................................... 8
ATTACHMENT A: FES OCTOBER 26, 2017 DISCLOSURE .............................................................................. 10

I. The Pass Through Certificates (PTCs)

As with my 2016 presentations, my remarks today will be focused on topics likely to be of

interest to holders of the lease-backed PTCs issued by FG, GenMa and REMA.
--At October 31, 2017, $769,200,000 of FG’s 6.85% Pass Through Certificates (FG PTCs),
guaranteed by FES (but not NG), remain outstanding. The FG PTCs have the benefit of a
first lien on the bulk of Unit 1 at the coal-fired Bruce Mansfield Station.

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--At October 31, 2017, $335,000,000 of GenMa’s 10.60% Series C Pass Through
Certificates (GenMa PTCs) remain outstanding. The GenMa PTCs have the benefit of a first
lien on the Morgantown electric generating units. The GenMa PTCs no longer benefit
from a lien on the Dickerson electric generating units.
--At October 31, 2017, $220,000,000 of REMA’s 9.861% Series C Pass Through Certificates
(REMA PTCs) remain outstanding. The REMA PTCs have the benefit of a first lien on partial
interests in the coal-fired Conemaugh and Keystone electric generating units. The REMA
PTCs no longer benefit from a lien on the now gas-fired (formerly coal-fired) Shawville
electric generating units.

II. Meaning of October 26, 2017 Disclosure by FES

In its third quarter report on Form 10-Q filed on October 26, 2017, FE and FES indicated
for the first time that recovery prospects for FES unsecured debt were negligible (the 10/26
Disclosure). The full text of the 10/26 Disclosure is included in Attachment A. I will return to this
disclosure (II.4 below) after briefly setting the stage.
II.1 Pollution Control Revenue (Refunding) Bonds (PCRBs)

In my October 2016 remarks I noted that:

The FES-FG-NG capital structure is a system of interlocking debt and lease guaranties and
guaranteed secured and unsecured obligations (including letters of credit and put rights) with
respect to pollution control revenue refunding bonds (PCRBs). The capital structure is
a Churchillian riddle wrapped in a mystery inside an enigma.

After taking a deep dive into structure of FES’s PCRBs, I have hold firmly to my earlier view.
I have added to the FES source book the disclosure documents that relate to the presently
outstanding series of FES PCRBs. Please click here for complete list of the PCRB’s and references
to the FES source book locations for the disclosure documents.
The guaranties in place with respect to the PCRBs are comprised by a series of
intercompany guarantees executed among FES, FG and NG. The guaranties (the FES Guaranties)
an be found at the following links to the FES sourcebook: Items FSB 10, FSB 11, FSB 12 and FSB
13. To obtain credit ratings from S&P and Moody’s in March 2007, the FES Guaranties were
provided generally in favor of present and future holders of indebtedness of FES, FG and NG.
Accordingly, holders of the indebtedness of these companies have claims against each of FES, NG
and FG regardless of whether their primary obligor is FG, NG or FES.

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For now, the most salient facts concerning the PCRBs are:
--FG PCRB’s total $1.05 billion of which only $328 million are backed by FG first mortgage
bonds. The other $677 million of FG PCRB’s are unsecured obligations. NG’s PCRBs total
$1.26 billion of which only $285 million are backed by NG first mortgage bonds. The other
$842 million of NG PCRB’s are unsecured obligations. See list linked above.
--PCRBs include both secured and unsecured bonds that mature or may be put to FG or
NG (depending on the bond in question) in 2018, with $99 million of NG unsecured PCRBs
becoming put-able on April 2, 2018 and $141 million of FG secured PCRBs maturing on
June 1, 2018. Another $261 million of FG unsecured PCRBs become put-able on December
3, 2018. See list linked above.

II.2 $700 Million FE Secured Credit Agreement

In December 2016, FE began provided a two-year $700 credit facility to FES that was
guaranteed by both FG and NG. Please click here for a copy of the credit facility. The FG and NG
guarantees are supported by $250 million of FG first mortgage bonds and $450 million of NG first
mortgage bonds.
Adding to the complexity of the FES consolidated capital structure is the fact that the
credit facility removed itself from the scope of the FES Guaranties and included bespoke
guaranties by FG and NG. Among the significant differences between the FES Guaranties, on the
one hand, and the credit facility agreement guaranties, on the other hand, the FES Guaranties
defer guarantor subrogation rights until all guaranteed obligations have been paid in full. The
credit facility guaranties do not defer subrogation rights thereby adding further complexity to
the overall effect of the system of FES, FG and NG intercompany guaranties. Among other things,
the extreme complexity makes substantive consolidation of FES, FG and NG (in my view) more
likely.
II.3 Parental Support for Nuclear Operations

To meet Nuclear Regulatory Commission (NRC) requirements, FES provides a support

agreement to NG (the Support Agreement) of up to $400 million. According to FES, the NRC
typically relies on such parental support agreements to provide additional assurance that U.S.
merchant nuclear plants, including NG's nuclear units, have the necessary financial resources to
maintain safe operations, particularly in the event of extraordinary circumstances. FirstEnergy
Nuclear Operating Corp. (FENOC), the FE nuclear operating company (a subsidiary of FE but not
also a subsidiary of FES), made a March 16, 2017 submission to the NRC concerning the
continuing resiliency of the Support Agreement for NRC purposes. Please click here. The NRC has

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accepted the submission for its review and has projected completion of its review by May 31,
2018. Please click here.
The prospects for the NRC continuing to accept the Support Agreement do not appear to
be good. For example, in a September 11, 2017 safety evaluation for the independent spent fuel
storage facilities (ISFSF) at Beaver Valley, Perry and Davis-Besse, the NRC determined that the
Support Agreement was no longer adequate to meet NRC ISFSF requirements. Please click here.

II.4 Meaning of October 26, 2017 Disclosure by FES

The FG and NG first mortgages cover substantially all of the fixed assets of FG and NG
respectively. The 10/16 Disclosure states that first mortgage bond holders may not be covered
fully by asset values subject to the mortgages. The appearance of the 10/16 Disclosure is a
substantial indication that unsecured FES/FG/NG obligations --- including unsecured PCRBs and
FG PTCs (and lease tax indemnity claims) --- may have minimal recovery prospects (certainly less
that the 40% of face trading value for the unsecured PCRBs and PTCs). Given the substantial
ongoing needs of the nuclear units for strong credit ratings and the first mortgage bond position
held by FE, there is a good chance (in my view) that an FES/FG/NG reorganization would be built
on a plan that keeps the generating assets (other than the leased interests in Mansfield Unit 1)
within the FE family while providing modest recoveries for unsecured Fes/FG/NG claims.

III. The Pending GenOn Plan of Reorganization

On June 14, 2017, GenOn and some (but not all) of its direct and indirect subsidiaries
commenced cases (collectively, the GenOn Debtors) commenced reorganization cases under
chapter 11 of the Bankruptcy Code in the United States Bankruptcy Code for the Southern District
of Texas (the Bankruptcy Court). On October 5, 2017, the Bankruptcy Court issued an order
which, among other things, approved a Disclosure Statement (the Disclosure Statement) for the
Second Amended Joint Chapter 11 Plan of Reorganization of the GenOn Debtors (the Debtors’
Plan). Please click here for the Disclosure Statement. The Debtors’ Plan is attached as an exhibit
to the Disclosure Statement.
I will use the occasion of the Disclosure Statement and the Debtors’ Plan to revisit briefly
my June 2016 GenOn presentation.

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III.1 Who is Covered by the Debtors Plan?

The GenOn Debtors commenced their chapter 11 cases in with overwhelming support
from their key stakeholders. The restructuring support agreement features the support of the
GenOn Debtors’ current equity holder, NRG Energy, Inc., certain holders representing greater
than 93% in aggregate principal amount of GenOn’s outstanding senior unsecured notes (and
certain holders representing greater than 93% in aggregate principal amount of GenOn Americas
Generation, LLC’s outstanding senior unsecured notes.
Two of the non-Debtor subsidiaries are GenMa and REMA. Included among the GenOn
Debtors are:
• GenOn Energy Management, LLC (GEM) (at present, GEM is the sole purchaser of energy
and capacity from the GenMa and REMA generating facilities); and

• GenOn Energy Services, LLC. (GES) (at present, the employer of all personnel for the
REMA and GenMa generating facilities).1

Debtors’ Plan, as proposed, will thus reorganize all functional and commercial aspects of
the leased generating facilities other than the application of power sale proceeds (received from
GEM) to the payment of rent. In my view, Debtors’ Plan is also, ultimately, a plan of
reorganization for GenMa and REMA.

III.2 The Exclusion of GenMa and REMA

The exclusion of GenMa and REMA from the proposed2 Debtors’ Plan came as a surprise
to me. I view the reorganization of both GenMa and REMA as inevitable. The surprise to me is
that the holders of the GenOn notes and the GAG notes coalesced into a working group (via the
restructuring support agreement) to the exclusion holders of the REMA and GenMa PTCs. The
PTC holders appear to be comfortable with such exclusion. The PTC holders seem also to be

1
GenOn, through GenOn Northeast Management Company (GNMC) (a Pennsylvania corporation),
operates the Conemaugh and Keystone generating facilities on behalf of the joint owners in such facilities
and on behalf of REMA, the lessee of an interest in Conemaugh and Keystone. GNMC is not included
among the GenOn Debtors.

2
The Debtors’ Plan has not yet been formally accepted by required creditor constituencies Such
acceptance is required before the Bankruptcy Court may confirm Debtors’ Plan. The concluding step in
the process would be consummation of the Debtors’ Plan in conformity with the Bankruptcy Court’s
confirmation order.

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comfortable with the Debtors’ Plan proceeding without them. Further, the PTC holders appear
to not have had a significant role in the formulation of Debtors’ Plan.

The acquiescence of the PTC holders appears to be reflected in (driven by?) trading prices
for the PTCs. The REMA PTC’s have hovered in the low 70s over the past couple of months. The
GenMa PTCs have traded in the mid to high 90s over the past two months. I understand that both
issues are thinly-traded. In comparison, the FG PTCs have traded in the low to mid 40s (also thinly
traded).

III.3 Is PTC Acquiescence/Silence Warranted?

On October 30, 2017, the GenOn Debtors filed their Plan Supplement documents. Please
click here for the Plan Supplement documents. One of the Plan Supplement documents is the
listing of executory contracts to be assumed. For ease of review, I have excerpted the listing
(Exhibit J) from FSB Item 171. Please click here for Exhibit J.

Included in Exhibit J are several GenMa and REMA contracts that are vital to the ongoing
operation of the leased units. See contracts 330-316, 321, 342, 513, 1092 and 1173-1177. No
detail is provided as to the nature of such contracts. It is next to impossible to determine GenOn’s
intent going forward concerning operations at the REMA and GenMa power plants

There are $550 million of PTCs outstanding. In numerous areas critical to the recovery
prospects for the PTCs, the Disclosure Statement is silent. Technically, the PTC holders are not
creditors of the GenOn Debtors and a disclosure statement need not, therefore, address the
presence or absence of effects on the PTCs. However, restructuring of GenMa and REMA remains
(in my estimation) inevitable. PTC holders need basic information to assess properly the viability
in fact of Debtors’ Plan for GenOn, the other GenOn Debtors, GenMa and REMA. At the very
least, GenOn should address the following matters:

1. The contract(s) pursuant to which employee and other support services are provided
to GenMa and REMA by GES (a GenOn Debtor): will these sole-source intercompany
contracts be accepted, rejected and/or modified upon plan consummation? Contract
rejection could result in an immediate need for GenMa and/or REMA to seek chapter 11
protection.

2. The contract(s) pursuant to which GEM (also a GenOn Debtor) provides process inputs
(such as coal and lime) to, and markets power and energy from, the leased plants: will
these integral intercompany contracts be accepted, rejected and/or modified upon plan
consummation? Will the GenOn Debtors’ exit-financing arrangements enable/allow GEM

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to post collateral and/or letters of credit to support input purchases and/or output sales
and trading? If so, on what terms?

IV. The Motors Liquidation

In 2006, General Motors Company (Old GM) obtained a secured term loan (the Term
Loan) of approximately $1.5 billion pursuant to an agreement among Old GM, Saturn
Corporation, JPMorgan Chase Bank, N.A. (JPMorgan) as administrative agent, and a syndicate of
lenders. The loan was secured by collateral that included equipment and fixtures at forty-two Old
GM facilities throughout the United States. To perfect the term lenders’ security interests in the
collateral, JPMorgan caused a UCC-1 financing statement (the Delaware Financing Statement) to
be filed with the Delaware Secretary of State, perfecting the lenders’ interest in all equipment
and fixtures at forty-two facilities owned by Old GM. To ensure that the lenders had a first-
priority lien on fixtures, JPMorgan also caused twenty-six financing statements (the Fixture
Filings) to be filed in counties where “Material Facilities”—defined as Old GM manufacturing
facilities with collateral exceeding $100 million of net book value—were located. Interests in the
Term Loan were ultimately assigned to more than 500 parties. It seems probable that included
in the 500 are holders of GenMa PTCs, REMA PTCs and FG PTCs.
The Official Committee of Unsecured Creditors of Old GM (the Committee) learned that
on October 30, 2008, JPMorgan had authorized the filing of a UCC-3 termination statement (the
Termination Statement) with the Delaware Secretary of State, terminating the Delaware
Financing Statement. As a result, the Committee believed that the Defendants may not have been
fully secured as of the Petition Date. Official Comm. of Unsecured Creditors of Motors Liquidation
Co. v. JPMorgan Chase Bank, N.A., 755 F.3d 78, 82 (2d Cir. 2014). The Old GM Bankruptcy Court
authorized the Committee to institute an adversary proceeding to challenge the perfection of the
Term Loan collateral.
The Committee filed its avoidance action on July 31, 2009, seeking to recover amounts
overpaid to Defendants based on the mistaken assumption that their security interests were
perfected and their claims fully secured. On March 1, 2013, the Bankruptcy Court held that the
filing of the Termination Statement was ineffective and, therefore, that the security interest
covered by the Delaware Financing Statement was perfected as of the Petition Date. Official
Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A., 486 B.R.
596, 647 (Bankr. S.D.N.Y. 2013). The Second Circuit ultimately reversed, holding that the
Termination Statement was effective and terminated the Delaware Financing Statement, leaving
in effect only the twenty-six Fixture Filings. Official Comm. of Unsecured Creditors of Motors
Liquidation Co. v. JPMorgan Chase Bank, N.A., 777 F.3d 100, 105 (2d Cir. 2015).
Following remand, a liquidating trust replaced the Committee as plaintiff and commenced
the second phase of the litigation to determine the extent and value of the security interest in

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collateral perfected by the twenty-six Fixture Filings (the Surviving Collateral). The key tasks in
the second phase of the litigation involved identification of the assets comprising the Surviving
Collateral and determination of the proper method for valuing that Surviving Collateral. Given
that there were over 200,000 assets that might qualify as Surviving Collateral, the parties and the
Bankruptcy Court recognized that a trial on all assets was virtually impossible. To facilitate a more
efficient resolution, the Bankruptcy Court directed the parties to try a representative set of forty
assets selected by the parties (the Representative Assets).
After a long trial, the Bankruptcy Court issued its Representative Assets opinion on
September 26, 2017 (the GM Fixture Opinion). Of greatest significance for PTC holders is the
Bankruptcy Court’s reasoning concerning the status of the Representative Assets as
predominantly fixtures (real property). Please click here for a link to the GM Fixture Opinion.
The GM Fixture Opinion addresses issues arising under Ohio and Michigan law and is not
applicable, as such to Pennsylvania and Maryland power plants. Pennsylvania law and Maryland
law on fixtures is not that different from Ohio and Michigan law particularly in light of the
Pennsylvania repeal of the integrated plant doctrine (for more on such repeal and its possible
effect for Pennsylvania power plants, see my 2016 FES presentation linked at the beginning of
these remarks). In light of the similarities among Ohio, Michigan, Maryland and Pennsylvania law
on the characterization of integrated systems installed on/in concrete, a FES, REMA and/or
GenMa bankruptcy court may be persuaded by the reasoning and general conclusions reached
in the GM Fixture Proceeding.

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ATTACHMENT A: FES OCTOBER 26, 2017 DISCLOSURE

In the event of a foreclosure, liquidation, bankruptcy or similar proceeding involving

FES, FG or NG, the value of the collateral securing the secured indebtedness of FG and NG may
not be sufficient to ensure repayment of such indebtedness and, in the case of a bankruptcy
proceeding, the ability of holders of such indebtedness, including FE, to realize any such value
may be delayed or otherwise limited
FG and NG have secured pollution control notes outstanding of $612.2 million (FG -
$327.6 million of FMBs; NG - $284.6 million of FMBs) and secured obligations supporting FES’
$500 million revolving line of credit and $200 million additional credit support with FE (FG - $250
million of FMBs; NG - $450 million of FMBs). In the event of a foreclosure, liquidation, bankruptcy
or similar proceeding affecting FES, FG or NG or any of their respective properties or assets, the
value of the collateral securing such indebtedness or the net proceeds from any sale or
liquidation of such collateral, as applicable, may not be sufficient to pay the obligations under
such secured indebtedness. If the value of the collateral or the net proceeds of any sale of such
collateral, as applicable, are not sufficient to repay all amounts due with respect to such secured
indebtedness, the holders of the secured indebtedness would have an unsecured claim for the
deficiency in value or proceeds against the applicable obligors alongside all other unsecured
creditors of such obligor. None of FG, NG or FES can assure holders of their respective secured
debt that, if a sale process were to be pursued, the collateral will be saleable or, if saleable, that
there will not be substantial delays in its liquidation due to, among other things, the need for
regulatory authorization from the FERC, NRC or other governmental authorities, as applicable.
Additionally, in the context of a bankruptcy case by or against FES, FG or NG, the holders
of the secured indebtedness may not be able or entitled to receive payment of interest, fees,
(including attorney’s fees) costs or charges related to such secured obligations, and may be
required to repay any such amounts received by such holders during such bankruptcy case.
The value of the collateral securing FG’s and NG’s secured obligations is subject to
fluctuation and will depend on market and other economic conditions, including the availability
of any suitable buyers for the collateral, which could be impacted by the risks and costs
associated with operating nuclear generation facilities in the case of NG’s properties and the risks
and costs of operating coal and other fossil-fueled generation facilities in the case of FG’s
properties, including, in each case, complying with federal, state and local statutes and
regulations associated with public health and safety and the environment.

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