Even though Moody's holds to the negative outlook from February, they point out the following:
"The company's recently announced strategy calls for a incremental $2.8 billion investment in transmission assets during the period 2014-2017. The bulk of the investment is to occur within the footprint of the company's Ohio-based distribution utility subsidiaries. FE has committed to funding 40-50% of the $2.8 billion transmission spend with equity which FE believes will allow it to maintain specific financial metric targets during the intended investment cycle.
We view investment in transmission assets by utilities positively as they typically earn a strong FERC-approved return in excess of 11%, generate predictable cash flows and have minimal operating risk. In FE's case, a significant portion of its investment plan involves rebuilding and upgrading existing assets, reducing concerns around construction risk.
I did not see any surprises other than the stock price decline yesterday. They are looking to expand, as utilities do, and that will require both debt and equity. In turn they will get an allowable ROE. As mentioned below, there are rumblings that ROE has been greater than allowed, and that could result in a rate reduction. Something like that, typically shouldn't change the long term value of the company.
“Moody's changed FE's outlook to negative from stable in late February 2013 to reflect headwinds facing the consolidated entity. While FE has taken steps to address some credit concerns, we continue to await the outcome of its Jersey Central Power and Light (JCP&L: Baa2 senior unsecured, negative) subsidiary's rate case prior to reconsidering the outlook.” Moody’s 11/11/13
“JCP&L is among FE's most significant subsidiaries, accounting for approximately 14% of revenue and approximately 20% of total distributions from subsidiaries.”
“There have been claims by parties involved in the rate case that JCP&L has historically earned in excess of its allowed return. As such, a concern is that a rate reduction could potentially be an outcome from the rate case. Given that JCP&L's financial flexibility has been weakened by the costs associated with Superstorm Sandy, a significant rate reduction has the potential to trigger negative rating outcomes at JCP&L and FE.”
How much dilution will be required to finance this "equity" driven investment. At 40% we will need to raise 1.12 billion. At $36/share that comes to around 31 million shares. Now 31/418 = .074. So the worse case scenario is a 7.4% dilution at current share price. Now if the dividend stays at current levels hat increases the quarterly payout by 17.05 million or 68.2 million/year. If you add to that the 60% to be financed by bonds which may in fact carry a very high interest rate investor appeal goes down the toilet. I think FE will have to seriously reduce the dividend to make this happen.
I would like to hear from other investors who also currently hold FE. I am willing to accept a dividend reduction if the result makes the 60% bond expense far smaller that it would otherwise be if we continue the current payout.
Why assume that FE over time can not increase operating earning per share to $4.00 a share and increase the dividend? They could even split the company up and generate even more value over time. The upcoming cold winter could be very positive for operating earnings.