FirstEnergy Downgraded At Goldman Sachs, Expects Large Equity Offering

While multiples in the Regulated Utilities segment could remain elevated, against the backdrop of continued low interest rates, FirstEnergy Corp. FE could come under pressure as its above-market, non-regulated hedges expire and the company faces competition, Goldman Sachs’ Michael Lapides said in a report. He downgraded the rating on FirstEnergy from Neutral to Sell, while reducing the price target from $36 to $31.

Analyst Michael Lapides cited the reasons for the downgrade as:

• Below-consensus EPS estimates for 2018, with above-market hedges set to roll off
• High leverage at the non-regulated segment
• Significant equity financing needs
• Valuation
• Dividend growth of 1 percent, versus the peer median of 5 percent

Consensus May Prove Aggressive

Lapides mentioned that the estimates for 2018 were about 6 percent below the consensus expectations, with FirstEnergy energy margins contracting 20 percent versus the 2017 levels. This is because the company’s above-market hedges were set to expire in 2018, offsetting higher capacity revenues.

Substantial Equity Issuance

The analyst expects FirstEnergy to issue equity worth $1.2bn, representing about 8 percent of the current market cap between 2016 and 2019. The company would resort to equity issuance in the face of weakening credit metrics at its non-regulated segment.

The current price target reflects 11 percent downside, versus 1 percent average upside “for our US utility universe,” Lapides commented.

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