FirstEnergy (NYSE:FE) reported earnings last Tuesday, beating on both top and bottom lines. But what should've been a day to celebrate for FirstEnergy shareholder ended with a 1% dip in share prices. Let's take a deeper look to see why this dividend stock didn't deliver.

Number crunching
FirstEnergy sales clocked in at $3.7 billion for Q1 2012, 1.1% above analyst expectations but 5.8% below 2012's first quarter. But falling sales are a sectorwide issue, and FirstEnergy's bottom line is what matters most to investors.

The utility's adjusted EPS hit $0.76, a solid 10.1% higher than analysts' prediction. But as with sales, an adjusted EPS comparison to Q1 2012 still shows an overall slump, down 7.3%. 

Looking ahead, FirstEnergy confirmed its 2013 guidance of $2.85 to $3.15 adjusted EPS.

Did FirstEnergy's fundamentals come second?
FirstEnergy has been hard at work making headway on a retail strategy to balance its books and improve liquidity to keep its investment grade tip-top. And while the utility has managed to increase its customer base by a whopping 42%, sales margins tightened their grip this quarter. Commodity pricing is out of FirstEnergy's control, and a margin squeeze in its unregulated business pushed overall EPS down a whopping $0.14 for this dividend stock.

FirstEnergy wasn't the only utility to feel the burn from backwards hedges. Exelon (NYSE:EXC) took a one-time $235 million hit this quarter as natural gas prices unexpectedly headed higher. Likewise, PP&L's (NYSE:PPL) generation unit EPS fell more than 50%, primarily because of trimmed hedged wholesale prices. Meanwhile, Ameren (NYSE:AEE) is defying traditional diversity by exiting the generation business and relying entirely on regulated sales for revenue. While this might cause the utility to lag when margins expand, it safeguards earnings and keeps this dividend stock sustainable no matter where commodity prices head.

But even if FirstEnergy hit a hard spot with bad hedges, rising natural gas prices bode well for this utility's energy portfolio. The power company counts on coal for 64% of its capacity, with nuclear responsible for an additional 18%.


After suffering from cost competitiveness worries over the past few years, a gas-price increase could mean new futures for these fuels.

Can debt kill this dividend stock?
Alongside growth opportunities and retail strategy, FirstEnergy has highlighted its debt as a serious focus for 2013. Through a series of notes issuances and buybacks, FirstEnergy has dropped its competitive business' debt by $1.5 billion. Its debt-to-equity ratio currently clocks in at 1.6, below the industry's 2.2 average but significantly higher than the likes of Exelon's 0.94 ratio.

The utility is also taking a page of out NextEra Energy's (NYSE:NEE) book through its planned sale of 1,240 MW of hydro assets by 2014. NextEra offloaded its final 351 MW of hydro assets in March, enabling the company to focus on "areas with greater growth potential." FirstEnergy's and NextEra's exits are hardly anomalies, as various utilities concentrate their assets to cut costs and maximize economies of scale.

Can FirstEnergy finish first?
FirstEnergy share prices are up just 2.75% for 2013, compared with a 14.16% rise for the Dow Jones U.S. Utilities Index. With only 6% natural gas capacity, this utility's generation portfolio is well protected from gas-price increases. And although this dividend stock offers a 5.1% yield, a heavy payout won't do its book-balancing any favors.

Despite FirstEnergy's positive earnings report, its share price currently places this utility out of my investment comfort zone. Looking ahead, investors should keep an extra close watch on margins. If FirstEnergy can keep costs lower as its booming customer base demands more electricity, its priced-for-perfection shares may match my expectations.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.