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FirstEnergy (FE) Benefits from Expanding Regulated Base

AEE FE DTE AVA

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On Nov 17, 2016, we issued an updated research report on diversified energy company FirstEnergy Corp. (FE - Free Report) . FirstEnergy’s expanding regulated base and modernization drive are expected to boost its earnings, over the long haul.

Recently, FirstEnergy declared third-quarter 2016 operating earnings of 90 cents per share, beating the Zacks Consensus Estimate of 76 cents by 18.4%. Quarterly earnings, however, fell 8.2% year over year. Total revenue came in at $3,917 million, beating the Zacks Consensus Estimate of $3,828 million by 2.3%.

FirstEnergy’s efforts to expand its regulated generation mix have rendered stability to the company’s earnings trajectory. The last few years saw the company successfully beefing up its regulated operations. In the coming years, it plans to reduce its merchant fleet generation in an attempt to cushion itself from market volatilities. Management expects earnings from the regulated operations to grow at a compound annual rate of 4–6% over the 2016–2019 timeframe.

FirstEnergy’s modernization drive is expected to improve its service reliability and lead to customer retention. As part of this initiative, the company introduced the ambitious “Energizing the Future” plan, aimed at upgrading and expanding its regulated transmission capabilities. It calls for the investment of $4.2–$5.8 billion over the 2017–2021 period.

Further, FirstEnergy intends to deploy $3.7–$5.4 billion over the next 8–15 years for grid modernization initiatives, subject to the Public Utilities Commission of Ohio’s review and approval.

On the flip side, FirstEnergy’s nuclear operations lead to the generation of toxic nuclear waste. These operations are thus subject to various health and environmental mandates that could increase the capital costs of running them. Besides, nuclear plants run the risk of unplanned outages, which could adversely affect production volumes. Also, stringent regulations and intensifying competition are some of the headwinds ahead of the company.

Zacks Rank & Key Picks

FirstEnergy carries a Zacks Rank #2 (Buy). Other favorably placed stocks in the same space include Avista Corp. (AVA - Free Report) , Ameren Corporation (AEE - Free Report) and DTE Energy Company (DTE - Free Report) .

Avista has seen one upward estimate revision for 2016 over the last 60 days. The stock carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ameren Corp., another Zacks Rank #2 stock, has seen four upward estimate revisions for 2016 over the last 60 days.

DTE Energy has seen six upward estimate revisions for 2016 over the last 60 days. The stock carries a Zacks Rank #2 as well.

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