FirstEnergy’s most recent quarterly numbers and its outlook for 2015 are both dismal and in line with a report we published last fall, “FirstEnergy Seeks a Subsidized Turnaround.”
If anything, FirstEnergy’s problems have only gotten worse since we issued our report:
- FirstEnergy’s net income (revenues less expenses) continues to decline. Here’s the spiral: From $869 million in 2011 to $392 million in 2013 to $299 million in 2014.
- Its earnings per share fell to its lowest point in a decade. Earnings per share in 2014 were $0.51, down from $0.90 in 2013.
- Its long-term debt, already among the highest in the utility industry, increased from $15.8 billion in 2013 to $19.2 billion in 2014, and on its fourth-quarter earnings call, the company’s chief financial officer conceded that the parent holding company is carrying more debt than “we are comfortable with.”
FirstEnergy’s weak performance stems from its merchant generation business, which is dominated by obsolete coal-fired generation that is struggling to compete in the wholesale power markets. FirstEnergy’s merchant generation segment posted negative net income in 2014 — even more negative than in 2013. Financial analysts at UBS are continuing to value FirstEnergy’s merchant business at $0 (UBS re-iterated its buy rating after the recent earnings call, noting that while “investor expectations have been declining” the company “appears to have missed even the low bar.”
In the company’s fourth-quarter earnings call, executives emphasized how it is relying on a proposed power-purchase agreement in Ohio to improve its financial performance. Under the proposal, FirstEnergy’s regulated electricity distribution companies would enter into a 15-year agreement to purchase power from several of FirstEnergy’s merchant power plants at a fixed price. In other words, Ohio electricity customers would be required to subsidize these plants—by paying more than the market price for their output—so that FirstEnergy can keep operating them. In its testimony to the Public Utilities Commission of Ohio, FirstEnergy stated very clearly that the reason it is angling so hard for ratepayer subsidies is that “markets have not, and are not, providing sufficient revenues to ensure continued operation of the plants.”
Until recently, FirstEnergy was a vociferous champion of free markets, a stance it began to express when electricity markets were deregulated in Ohio in 2000. FirstEnergy has taken a big step back from that rhetoric now that the free market is not working out for the company. In that fourth-quarter earnings calls, a few words in particular from Chuck Jones, FirstEnergy’s new CEO, spoke volumes: “We trust the regulator to look out for a future Ohio more than we do the markets.”
The company’s bet on ratepayer subsidies might not pan out. The Public Utilities Commission of Ohio (PUCO) last week ruled against a very similar proposal by American Electric Power, noting that the AEP pitch would have raised rates without offering any additional benefits to Ohio electricity consumers.
Speculation is emerging across the industry now that, if FirstEnergy doesn’t get PUCO to sign off on the power-purchase agreement it wants, it will sell its entire merchant-generation business. That would move FirstEnergy even further—in a desperate scramble to survive—toward becoming a completely regulated company with more stable (and larger) profits.
As it stands, FirstEnergy’s current business strategy is not working, and the company’s decline continues. This can be seen plainly in its stock performance, down almost 17 percent over the past month.
Cathy Kunkel is an IEEFA fellow.
