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IEEFA Report: What’s Wrong With FirstEnergy, Part 2

October 07, 2014
Tom Sanzillo and Cathy Kunkel

By Tom Sanzillo and Cathy Kunkel

Yesterday we published a report titled “FirstEnergy: A Major Utility Seeks a Subsidized Turnaround,” in which we chronicled a series of management failures and executive policies that have placed FirstEnergy Corp. in serious trouble.

We accompanied publication of the report with a blog post offering some key findings. We’re blogging all week on our FirstEnergy research, and today our post focuses on the company’s weak numbers.

Here’s the gist: the company’s financial condition has deteriorated since it merged with Allegheny Energy in 2011, and its key financial metrics are on a downward trajectory that stems from the fact that FirstEnergy’s business—the sale of electricity—is weak. FirstEnergy is suffering from a declining stock price, declining revenues, declining net income and rising debt levels.

What’s driving these bad numbers? The company’s failure to consistently bring recurring revenues into alignment with recurring expenses—and its over-reliance on stop-gap, short-term measures.

While the industry as a whole is challenged by low natural-gas prices and the transition from coal-fired generation, most large investor-owned utilities are navigating these challenges. This is reflected in industry credit ratings. In November 2013, for instance, Moody’s placed 167 U.S. utilities on ratings-upgrade review, citing a favorable outlook for the industry as a whole. FirstEnergy was conspicuously absent from that list. Likewise, as Standard and Poor’s this year upgraded the utility sector from BBB to BBB+, it left FirstEnergy among only six companies with a BBB- or below rating.

FirstEnergy’s stock performance has been dismal, down more than 30 percent from its peak in mid-2012. This contrasts with a backdrop of modest economic growth and rising stock values. The Dow Jones Industrial Average is up 33 percent[update as needed] since mid-2012, and the SNL Energy Index has risen similarly.

FirstEnergy revenues dropped to $14.9 billion in 2013 from $16.1 billion in 2011. Net income plummeted during that time, to $392 million from $869 million. The company’s short-term and long-term debt has soared, and its coal-powered holdings have steadily lost value.

How have company executives responded? Partly by slashing dividends and masking imbalance in revenues and expenses with a series of one-time resource infusions, a strategy that strongly suggests FirstEnergy’s business model is financially unsustainable.

Indeed, one of the more sobering takeaways from our research is that FirstEnergy  lacks a sensible longer-term turnaround strategy that would bring recurring revenues in line with recurring expenses. The company seems to be counting instead on a strategy of subsidies and bailouts that–while costly to ratepayers–will not solve FirstEnergy’s underlying problems.

We’ll talk more about the company’s questionable political and regulatory behavior later in the week. But first we want to touch on FirstEnergy’s flawed forward-looking strategy. That will be the subject of our next post.

Tom Sanzillo is IEEFA’s director of finance. Cathy Kunkel is an IEEFA research fellow.

 

Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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Cathy Kunkel

Former Energy Finance Analyst Cathy Kunkel has written reports and given expert testimony on the finances of Appalachian natural gas pipelines and drilling; electric utility mergers, rates and resource planning; energy efficiency; and Puerto Rico’s electrical system. She has degrees in physics from Princeton and Cambridge.

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