Moody's: Dividend Cut by FirstEnergy (FE) is Credit-Positive Action; No Change Warranted
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Price: $38.33 +0.31%
Overall Analyst Rating:
NEUTRAL (
Up)
Dividend Yield: 4.4%
Revenue Growth %: +1.3%
Overall Analyst Rating:
NEUTRAL (
Up)Dividend Yield: 4.4%
Revenue Growth %: +1.3%
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FirstEnergy Corp.'s (NYSE: FE: Baa3, negative outlook) announced 35% reduction in annual dividend to $1.44 per share from $2.20 per share reduces the company's annual payout by approximately $320 million; however, this credit positive action is not sufficient to trigger a revision of the company's outlook which remains negative.
While FE has taken several steps to reduce its consolidated risk profile, we continue to await the outcome of its Jersey Central Power and Light (JCP&L: Baa2 senior unsecured, negative outlook) subsidiary's rate case. Moreover, FE's cash flow guidance announced yesterday for 2014 is lower than we had previously anticipated.
JCP&L is among FE's most significant subsidiaries accounting for approximately 14% of consolidated assets, 13% of revenue and 20% of total subsidiary distributions. There have been claims by parties involved in JCP&L's rate case that the utility has historically earned in excess of its allowed return. As such, there is a concern that a rate reduction could potentially be an outcome from the pending rate case that also involves the proposed recovery of Superstorm Sandy-related costs and a resolution of the calculation of JCP&L's Consolidated Tax Adjustment.
Given that JCP&L's financial flexibility and financial metrics have already been weakened by the debt funded recovery costs associated with the storm, a material rate reduction has the potential to trigger negative rating outcomes at JCP&L and FE.
JCP&L's key financial metrics during the twelve month period ended September 30, 2013 included CFO pre-WC to debt and interest coverage of approximately 12% and 3.4 times, respectively, which are weak for the current rating category. FE's consolidated key financial metrics of approximately 12% and 3.5 times, respectively, also remain weak for its rating category driven in part by higher-than-anticipated debt balances. We had anticipated FE's consolidated metrics would improve to 14% and more than 3.5 times, respectively, in 2014.
Our evaluation of FE and JCP&L's negative outlooks will consider the positive attributes associated with the company's dividend reduction and transmission-investment strategy previously announced last November. We view investment in transmission assets positively as they typically earn a strong FERC-approved return in excess of 11%, generate predictable cash flows and have minimal operating risk.
The retained cash associated with the reduced dividend will be used to fund a significant portion of FE's strategic transmission-investment program that entails planned incremental investments of $2.8 billion during the period 2014-2017. In addition, we will also re-evaluate our expectation for future power market conditions and the financial impact of the pending rate case.
FE's has historically sourced the cash required to fund its dividend from its portfolio of regulated subsidiaries. We do not expect the dividend reduction to impact FE's dividend requirement from its subsidiaries. FE's unregulated subsidiaries, FirstEnergy Solutions Corp. (FES: Baa3, stable) and Allegheny Energy Supply Company, LLC (AE: Baa3, stable), are both expected to be cash flow neutral, neither paying dividends nor requiring capital support from FE.
While FE has taken several steps to reduce its consolidated risk profile, we continue to await the outcome of its Jersey Central Power and Light (JCP&L: Baa2 senior unsecured, negative outlook) subsidiary's rate case. Moreover, FE's cash flow guidance announced yesterday for 2014 is lower than we had previously anticipated.
JCP&L is among FE's most significant subsidiaries accounting for approximately 14% of consolidated assets, 13% of revenue and 20% of total subsidiary distributions. There have been claims by parties involved in JCP&L's rate case that the utility has historically earned in excess of its allowed return. As such, there is a concern that a rate reduction could potentially be an outcome from the pending rate case that also involves the proposed recovery of Superstorm Sandy-related costs and a resolution of the calculation of JCP&L's Consolidated Tax Adjustment.
Given that JCP&L's financial flexibility and financial metrics have already been weakened by the debt funded recovery costs associated with the storm, a material rate reduction has the potential to trigger negative rating outcomes at JCP&L and FE.
JCP&L's key financial metrics during the twelve month period ended September 30, 2013 included CFO pre-WC to debt and interest coverage of approximately 12% and 3.4 times, respectively, which are weak for the current rating category. FE's consolidated key financial metrics of approximately 12% and 3.5 times, respectively, also remain weak for its rating category driven in part by higher-than-anticipated debt balances. We had anticipated FE's consolidated metrics would improve to 14% and more than 3.5 times, respectively, in 2014.
Our evaluation of FE and JCP&L's negative outlooks will consider the positive attributes associated with the company's dividend reduction and transmission-investment strategy previously announced last November. We view investment in transmission assets positively as they typically earn a strong FERC-approved return in excess of 11%, generate predictable cash flows and have minimal operating risk.
The retained cash associated with the reduced dividend will be used to fund a significant portion of FE's strategic transmission-investment program that entails planned incremental investments of $2.8 billion during the period 2014-2017. In addition, we will also re-evaluate our expectation for future power market conditions and the financial impact of the pending rate case.
FE's has historically sourced the cash required to fund its dividend from its portfolio of regulated subsidiaries. We do not expect the dividend reduction to impact FE's dividend requirement from its subsidiaries. FE's unregulated subsidiaries, FirstEnergy Solutions Corp. (FES: Baa3, stable) and Allegheny Energy Supply Company, LLC (AE: Baa3, stable), are both expected to be cash flow neutral, neither paying dividends nor requiring capital support from FE.
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