Why One Analyst Thinks FirstEnergy's Ohio Challenges Aren't As Bad As They Look

BofA Securities analyst Julien Dumoulin-Smith upgraded the shares of FirstEnergy Corp FE from Underperform to Neutral rating and raised the price forecast from $42 to $45.

Ohio is nearing a new regulatory framework that could present short-term transition risks but may benefit FE's regulated business long-term, said the analyst.

The proposed legislation simplifies rate-setting, moving away from the legacy electric security plan and introducing forward test years with annual adjustments.

This shift leaves Ohio earnings dependent on a single rate case over three years, increasing event risk. Meanwhile, Pennsylvania's H.B. 1272, introduced on April 21, could allow regulated utility ownership of generation assets, though it has a low likelihood of passing.

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Ohio’s S.B. 2 and H.B. 15 propose significant changes to ratemaking, offering benefits like forward-looking test years and eliminating complex riders.

However, FE may be restricted from raising rates until 2027. Even in the worst-case scenario, where rates remain frozen, the impact on EPS would be a manageable $0.05 shortfall.

This can be offset by over $150 million in capex optimization and effective O&M execution, enabling FE to maintain its guidance, noted the analyst.

The updated $2.66 EPS estimate for 2026 results in a 7% discount to the electric/gas peer group average P/E, reflecting Ohio regulatory risk and a weaker balance sheet. The price forecast is raised incorporating a 20% discount for Ohio distribution earnings due to regulatory risk.

The sum of the parts valuation includes a 5% premium for Pennsylvania distribution, a 5% discount for New Jersey integrated, a 20% discount for West Virginia/Maryland integrated, and a 20% premium for standalone FERC transmission.

According to the analyst, the stock is expected to trade at a 5%-10% discount until Ohio’s rate case is resolved, but lower operating earnings and a focus on pension and coal earnings are seen as a positive adjustment.

Despite recent underperformance, FE has potential upside through capex optimization, PJM transmission development, and datacenter integration. The transition in Ohio is manageable, and the company remains on track to meet guidance.

Price Action: FE shares traded lower by 0.2% at $42.57 on Wednesday.

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