Akron, Ohio-based FirstEnergy Corp. (NYSE:FE) disproves the popular contention that utilities are safe investments. Many investors see the utility sector as reliable due to the fact that utility companies possess territorial monopolies and have regulatory barriers protecting them from competitors.
And at first glance, FirstEnergy would seem to be a utility that would be an attractive proposition. The utility services six million people in Maryland, New Jersey, New York, Ohio, Pennsylvania, and West Virginia. With a market capitalization of $13.00 billion, and currently trading in the high $20 range with a forward price-to-earnings ratio of 11.73 and offering a dividend yield of 4.89%, FirstEnergy seems a bargain in the current market.
Dig deeper, though, and the reason for the share price decline illustrated in the chart above begins to make sense.
The Institute for Energy Economics and Financial Analysis, or IEEFA, has been keeping an eye on FirstEnergy for some time. In a 2014 report compiled by IEEFA Finance Director Tom Sanzillo and IEEFA Fellow and energy analyst Cathy Kunkel, the following assessment was made:
FirstEnergy is burdened by heavy reliance on an underperforming merchant coal fleet in a weak competitive market and a regulated coal plant portfolio that is profitable but unable to carry legacy debt and likely additional environmental retrofit costs.
That was in 2014. Since then, the IEEFA's assessment of FirstEnergy and its generation subsidiary FirstEnergy Solutions, or FES, has not improved. Indeed, if its May 5 report, written by Kunkel, is anything to go by, the situation is now much worse. According to Kunkel, all six of FES's coal and nuclear plants, four of which are located in Ohio, face closure:
FES's revenues declined every year from 2013 through 2016, and just within the past six months all three major credit rating agencies have downgraded its corporate bonds. In the fourth quarter of 2016, FES took an $8 billion loss to write down the value of its remaining coal and nuclear units - an acknowledgment that FES's coal and nuclear plants have lost 88 percent and 90 percent of their value, respectively...
Bleak as this picture is, it is made worse by the fact that FirstEnergy spokeswoman Tricia Ingraham has corroborated Kunkel's report:
It's not the kind of news we like to see about ourselves, obviously … but there are definitely some valid points in there, and it's certainly consistent with what we've been saying in our earnings calls and testimony. It backs up the position we've taken.
This bearishness seems justified. While FirstEnergy's revenue figures have been steady between 2012-2016, their net income figures are a cause for concern.
| Year | Revenue ($) | Net Income ($) |
| 2012 | 15.26 billion | 770.00 million |
| 2013 | 14.89 billion | 392.00 million |
| 2014 | 15.05 billion | 299.00 million |
| 2015 | 15.03 billion | 578.00 million |
| 2016 | 14.56 billion | -6.18 billion |
Couple that with the fact that FirstEnergy have $22.55 billion of debt on their books, against $43.15 billion worth of assets and $199.00 million worth of cash on hand, and the future prospects look less than rosy. Utilities generally do carry large debt due to the capital-intensive nature of their business, but the disparity between the revenue and net income figures in the case of FirstEnergy, coupled with the perilous state of FirstEnergy Solutions, leaves little consolation that they will be able to cover their dividend payments to shareholders going forward.
The one bright spot is that FirstEnergy are attempting to become a pure-play regulated utility, and away from competitive generation. They have earmarked thirteen power plants for sale or closure, and in January announced the sale of four gas generating plants in Pennsylvania and the divestment of its part-ownership in a Virginia-based hydroelectric power station to LS Power Equity Partners III LP for $925 million.
However, this transition is an uncertain process, as the flexibility of FirstEnergy is constrained by its financial position - it has a further $515 million worth of debt due in 2018, in addition to the other factors outlined above - all of which leave me bearish on FirstEnergy's prospects going forward.
DISCLAIMER: The author is not a financial professional and accepts no responsibility for any investment decisions a reader makes. This article is presented for information purposes only. Furthermore, the figures cited are the product of the author's own research and may differ from those of other analysts. Always do your own due diligence when researching prospective investments.
