Why FirstEnergy Earnings Could Power Down

FirstEnergy (FE 1.44%) will release its quarterly report on Tuesday, but investors have already braced themselves for tougher conditions in the utility industry. With interest rates on the rise, the industry's high debt levels will pose an increasing burden on FirstEnergy earnings and on results from its competitors as well.

Debt service by itself isn't the only issue FirstEnergy faces, though. Expected prices for electricity in the next several years have plunged recently, reflecting lower fuel costs and uncertain prospects for demand picking up. With the company planning to phase out some of its production capacity, will First Energy be able to produce the growth investors want to see? Let's take an early look at what's been happening with FirstEnergy over the past quarter and what we're likely to see in its quarterly report.

Stats on FirstEnergy

Source: Yahoo! Finance.

Will FirstEnergy earnings black out?
Analysts have actually been slightly more optimistic in recent months about prospects for FirstEnergy earnings, boosting both their June-quarter and full-year 2013 estimates by a penny per share. The stock, though, hasn't shared that enthusiasm, falling 17% since the end of April.

This quarter isn't the first in which FirstEnergy has had to handle concerns about growth. In its first-quarter results, shares fell despite earnings and revenue figures that exceeded analyst expectations. FirstEnergy took a substantial hit from hedging itself in the natural-gas market, as price increases for nat-gas led to a $0.14 hit to earnings from its unregulated business. That's consistent with results we saw from Exelon (EXC 2.37%) and PPL during the quarter, as the nat-gas rebound took them and many other industry players by surprise. Like Exelon, FirstEnergy has little nat-gas exposure, with it relying mostly on coal with a substantial nuclear presence as well.

FirstEnergy's coal exposure has caused it trouble, forcing it to take tough measures. Last month, the company said it would retire two coal-fired power plants later this fall, citing the low prices in the electricity markets and the high costs of environmental compliance in justifying the Pennsylvania plant closures. Moreover, FirstEnergy has joined peer NextEra Energy (NEE 0.45%) with its plans to sell off its hydroelectric production assets, further concentrating on other production methods in light of updated views on the viability of hydroelectric power generation.

But a longer-term concern for FirstEnergy comes from a recent auction of planned 2016-2017 electrical capacity. Suppliers offered almost 170 gigawatts of capacity at prices that were less than half those at the previous year's auction, and in response, analysts downgraded FirstEnergy and Exelon. As long as natural-gas plants remain cheap and environmentally friendly, FirstEnergy will keep feeling the squeeze.

In the FirstEnergy earnings report, stay tuned for further measures the company might take to pay down debt. Without a rebound in electricity demand from the recovering economy, FirstEnergy will likely keep feeling the pinch from weak pricing and its own unique challenges.

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