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FirstEnergy Granted $203 Million In Rate Relief, Above Expectations

Barclays’ Gregg Orrill upgraded FirstEnergy Corp. FE 0.16% to Overweight from Equal Weight after the Ohio Public Utility Commission granted the company $203 million in rate relief for three years (and up to five), which was ahead of the analyst’s expectations.

“The Ohio rate relief was above expectations (29 cents versus 20 cents assumed) and as a result equity needs are lower ($1.5 billion versus $1.9 billion) to achieve the 14–14.5 percent FFO/debt required for investment grade. We like FE’s 4.5 percent dividend yield which we believe is sustainable in our stress scenarios,” Orrill wrote in a note.

The upcoming catalysts include a likely Pennsylvania rate settlement followed by guidance at the Edison Electric conference November 6.

In Pennsylvania, the company requested a $439 million rate increase and an 11.1 percent ROE. The analyst assumes a 10.2 percent ROE and $0.08 cents of accretion and $50 million cash flow.

At EEI, Orrill expects FE’s annual update to include ’17 EPS guidance, two years of merchant EBITDA guidance and cap-ex guidance for five years on transmission.

“What could accelerate value would be a sale of the merchant business which would reduce the investment grade hurdle on FFO/debt to 11% from 14 percent due to business mix which is a $6 billion swing in leverage,” Orrill continued.

The analyst raised his EPS estimates to $2.87 for ’16, $2.86 for ’17 and $2.81 for ’18 from the previously held $2.79/$2.78/$2.67.

Orrill also increased his price target by $1 to $37, which implies about 23 percent total return.

At time of writing, shares of First Energy were up 0.91 percent at $31.65.

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Oct 2016BarclaysUpgradesEqual-WeightOverweight
Aug 2016Bank of AmericaUpgradesNeutralBuy
Aug 2016Morgan StanleyUpgradesEqual-WeightOverweight

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