Why FirstEnergy Is a Top Utility Pick

Narrow-moat utility

It has now been over one year since FirstEnergy announced its planned separation from FirstEnergy Solutions, or FES, and no major new claims or guarantees have become public. Thus, we have a high level of confidence that FirstEnergy can separate itself from FES in 2018.

However, returning to its regulated past will likely require a big move: allowing FES to fall into bankruptcy. We estimate this could cost shareholders $1.7 billion for FES' unfunded liabilities and other cross-guarantees plus a potential $1 billion settlement with creditors to avoid yearslong litigation. The total of $2.7 billion is included in our fair value estimate.

The stock is also cheap relative to its peers. FirstEnergy trades at a 30% discount to other fully regulated U.S. utilities as of late December. We think the market is too concerned about the pending FES bankruptcy. Even if FirstEnergy assumes all $3 billion of FES debt, our fair value estimate falls by only about $2 per share. Once FES worries subside and the market revalues FirstEnergy as the fully regulated and narrow-moat utility that it is set to become, investors should realize attractive upside.

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