Earnings under pressure
FirstEnergy Corporation (FE) has large exposure to unregulated business operations. It derives nearly 40% of total revenue from its unregulated business. FirstEnergy’s earnings from regulated business have been struggling for the last few years due to subdued demand for electricity. On the other hand, the unregulated business segment has been under pressure due to volatile merchant power prices.
In 3Q15, FirstEnergy recorded a year-over-year increase in electric sales to residential and commercial customers. The increase was mainly the result of a 36% rise in cooling degree days during the quarter.
In terms of load growth over the long term, all four states where FE operates have seen negligible load growth due to energy efficiency programs. In the last three years, sales from residential and commercial customers have remained flat. There’s been little load growth among industrial customers, but this segment has the smallest margins of the three segments. Thus, low growth in this class has a negligible effect on earnings growth. Weak sales also hamper the competitive energy segment’s earnings.
Warmer-than-expected weather during 4Q15 may have a negative impact on FE’s earnings. Utilities (FXU) operating in the Midwest and the Eastern part of the United States have already reported weak earnings due to the unfavorable weather. The 4Q15 earnings of Dominion Resources (D), American Electric Power (AEP), and Xcel Energy (XEL) (reported last week) suffered due to unfavorable weather. Lower usage of electricity per customer in 4Q15 was partially offset by customer base additions influenced by the better state of the economy. To learn more about FirstEnergy’s business segments, read Where and Why Have FirstEnergy’s Revenues Been Falling?