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FirstEnergy (FE) Energizes $30M Transmission Project in Ohio

Zacks Equity Research

FirstEnergy Corp. FE has energized a transmission project in Elyria, OH in a bid to capitalize on the rising commercial and industrial electricity demand in the region.

Details of the Announcement

The key feature of this $30 million project is a new 345/138-kilovolt substation which will increase the electric capacity available to Ohio Edison, in addition to providing FirstEnergy greater flexibility to operate the local transmission network. The new substation will significantly strengthen the electric grid in the region and ensure that it can support higher commercial and industrial load.

The project included the construction of eight transmission lines supported by 36 new tower structures to connect existing power lines in the area to the new substation. Construction started in late 2015 and was completed safely, on time and within budget. The new facilities were energized ahead of the prior in-service deadline of Dec 2016.

The project is part of FirstEnergy’s ambitious “Energizing the Future” plan aimed at upgrading and expanding its regulated transmission capabilities. Under this initiative, the company is on track to invest $4.2–$5.8 billion over the 2017–2021 period.

Price Movement

FirstEnergy has underperformed the Zacks categorized Utility - Electric Power industry over the past 12 months. Shares of the company have lost 3.8%, compared with the industry’s 7.9% improvement.

This is because FirstEnergy, like most other unregulated utilities, has been grappling with its 13,162 MW competitive energy business over the last few quarters, despite consistent efforts to expand the regulated generation mix.

We note that the competitive energy business exposes FirstEnergy to market volatilities. Even though natural gas prices are on the rise, wholesale power prices have not benefitted from the trend, thus adversely affecting competitive power players.

Utility Industry Outlook

Primarily, three factors — historically low interest rates, public policies that promote the use of cleaner sources of energy and innovative drilling technologies — have led many companies in the utility space to venture into new areas of growth.

However, the Federal rate hike in Dec 2016, to some extent, dampened the enthusiasm for traditionally high-yielding utility stocks, as other income-oriented investments, such as bonds, became more attractive in comparison.

The Fed’s hawkish stance on interest rate hikes exposes utilities with high valuations and limited growth prospects to major risk.

As per an Energy Information Administration report, annual U.S. electricity produced from natural gas (34%) surpassed coal-fired generation (30%) in 2016. However, natural gas prices have recently begun to rise, again encouraging electricity generation from coal-fired power plants — this indicates a trend that is likely to continue through 2017. As a result, the share of natural gas in the generation mix in 2017 is expected to fall to 32.3%, while coal rises to 32.5%.

In addition, Donald Trump’s unexpected victory offered a ray of hope to utilities as his campaign had publicly advocated his support for fossil fuels. His policies may call for the rollback of the Clean Power Plan and other decarbonization regulations, which have been hurting utilities for quite some time now.

Zacks Rank & Key Picks

FirstEnergy carries a Zacks Rank #3 (Hold). A few better-ranked placed stocks in the same space include Spark Energy, Inc. SPKE, DTE Energy Company DTE and Exelon Corporation EXC.

Spark Energy's 2016 earnings estimates increased from $2.20 to $2.23 over the last 60 days. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

DTE Energy’s 2016 earnings estimates increased from $5.26 to $5.27 over the last 60 days. The company carries a Zacks Rank #1 as well.

Exelon’s 2016 earnings estimates increased from $2.66 to $2.68 over the last 60 days. The company carries a Zacks Rank #2 (Buy).

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