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FirstEnergy Banking On Growth Drives, Rising Debt A Risk

Published 08/22/2016, 09:45 PM
Updated 07/09/2023, 06:31 AM

On Aug 22, 2016, we issued an updated research report on FirstEnergy Corp. (NYSE:FE) . FirstEnergy’s broadening regulated base, growth in the transmission business and modernization drives are expected to boost its bottom line. However, a higher debt/capital ratio compared with its peers and a negative outlook by rating agencies may increase its cost of capital.

The company recently announced second-quarter 2016 operating earnings of 56 cents per share, higher than both the Zacks Consensus Estimate and the prior-year figure of 53 cents by 5.7%.Total revenue came in at $3,401 million, slightly higher than the Zacks Consensus Estimate of $3,384 million. However, revenues fell 1.9% from $3,465 million reported a year ago, on account of lower electric distribution deliveries, and lower transmission and Competitive energy services revenues.

FirstEnergy’s modernization drive will boost the company’s service reliability and lead to customer retention. It led to its ambitious “Energizing the Future” plan, aimed at upgrading and expanding transmission capabilities. Under this initiative, the company will invest $4.2 billion over the 2014–2017period, of which nearly $3 billion have been spent so far. The utility identified an additional $15 billion worth of investment opportunities to improve reliability in 2018 and beyond.

Moreover, FirstEnergy is focused on improving its financial position while reducing expenditure. The Cash Flow Improvement project, aimed at capturing both medium- and long-term saving opportunities, will ensure annual cost savings of $155 million in 2016 and $240 million by 2017. The company also aims to generate positive cash flows through 2018. As of Jun 30, 2016, FirstEnergy’s available liquidity stood at $3,267 million.

On the flip side, FirstEnergy’s debt/capital ratio stands at 61.7%, compared to the industry average of 49% and the S&P 500’s 42%. Note that the higher the debt relative to its capital, the higher the financial leverage and risk of default.

Further, FirstEnergy carries a rating a debt rating of “BBB-” and “Baa3” from the S&P 500 and Moody’s, respectively, with a negative outlook by both the firms. A negative outlook suggests that these rating agencies may downgrade FirstEnergy’s debt further in the future. A downgrade from its present credit rating could raise the company's costs and affect its ability to access capital.

Zacks Rank & Key Picks

FirstEnergy carries a Zacks Rank #3 (Hold).Some better-ranked stocks in the utility space are Korea Electric Power Corp. (NYSE:KEP) , Spark Energy, Inc. (NASDAQ:SPKE) and DTE Energy Company (NYSE:DTE) . Both Korea Electric and Spark Energy sport a Zacks Rank #1 (Strong Buy), while DTE Energy is a Zacks Rank #2 (Buy) stock.



KOREA ELEC PWR (KEP): Free Stock Analysis Report

FIRSTENERGY CP (FE): Free Stock Analysis Report

DTE ENERGY CO (DTE): Free Stock Analysis Report

SPARK ENERGY (SPKE): Free Stock Analysis Report

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