Morgan Stanley Maintains on FirstEnergy

In a report published Wednesday, Morgan Stanley analyst Stephen Byrd maintained Equal-weight on FirstEnergy FE, with a $35.00 price target. According to the report, yesterday's dividend cut was not a surprise and is now right sized to the regulated operations. While valuation and EPS have improved from the resulting decline in equity needs and 2014 guidance that was in-line with our forecast, near term headwinds and modest upside keep the analysts more neutral. “The dividend cut after the market close yesterday was not a surprise,” the report noted. “The 35% cut was about in-line with our expectation along with that of investors. The drivers of the reduction were largely due to weak PJM gas, power, and capacity prices that have been in decline the last few years. At the current level we believe the dividend is well supported by the regulated operations at a pay-out of ~60% of utility and parent EPS over the coming years, and the implied ~4.5% yield is in the range of peers.” Some risks from the report included changes in gas and power prices could affect EPS meaningfully; every $1/mmBtu move in gas impacts 2016 EPS by ~20 percent. Also, changes in regulatory dynamics from the existing constructive relationship may impact FE's utility earnings and ROEs. FE closed Tuesday at $32.15.