Shares of Akron, Ohio, utility FirstEnergy (FE) fell 10% on new federal regulatory orders that will prevent it from having customers help subsidize uneconomic coal and nuclear plants hurt by low priced natural gas in the Marcellus and Utica shale regions.
After the markets closed Wednesday, the Federal Energy Regulatory Commission, or FERC, sent orders to FirstEnergy and American Electric Power (AEP) that rescind affiliate waivers and reject implementing power purchase agreements, known as PPA's, with their generation businesses.
Analysts at bond research firm CreditSights wrote in a report that FERC's rejection of FirstEnergy's PPA's has serious implications for its credit profile, bond spreads and only remaining investment grade rating from Moody's Investors Service.
A solution to preempt rating action would be to issue a sizeable amount of equity, CreditSights said. "We may even hear the conversation shift to how can FE exit the merchant generation business," the analysts wrote.
Jefferies & Co. analyst Anthony Crowdell cut his rating on the stock to hold from buy and his price target to $35 from $40.50, citing the news. "Our buy rating was predicated on our belief the stock was a free option on FERC approving the PPA and without it we now believe FE is fair value," he said in a report.
Crowdell also lowered his earnings estimates to reflect the loss of PPA profits and included $2 billion worth of equity issuances to support the company's balance sheet, which he thinks could mean 32 cents to 40 cents in total dilution for shareholders.