Rats from a Sinking Ship

Last Friday, Goldman Sachs downgraded FirstEnergy from a hold rating to sell.

The firm cited, “(1) significant downside risks to consensus estimates, where we are 3%/13%/9% below on FY13/14/15, (2) tough fundamentals as retail margins remain weak for FE’s competitive segment and limited rate increases at FE’s regulated subsidiaries, and (3) potential negative catalysts from PJM planning parameters in February 2013.

Note number 2.  That’s Wall Street jargon for FirstEnergy got a little carried away in deregulated Ohio cutting their retail rates to compete with AEP, and now FE is stuck with low profits as a result.  That’s the problem with flat electricity demand.  The pie is no longer growing bigger for everyone, so power companies have to take customers away from each other.  That means they have to cut rates, at least in deregulated states, and that means lower profits for everyone.

The other part of number 2?  The part about “limited rate increases at FE’s regulated subsidiaries”? Do you think that had anything to do with the WV PSC not allowing FE to take away our scheduled rate cut?

And we can’t wait to see what surprise PJM has in store for FirstEnergy in February.  Goldman is right in the middle of electricity trading, and the company has never shied away from trading on inside information, so they clearly know something is up.  And if you are a shareholder in Goldman, don’t worry, Goldman always trades in front of the market with their own capital.  They waited until they had liquidated all their FE positions before the downgrade.

Remember this post.  FE is in trouble.  They need to liquidate their money losing coal plants.  But no one wants a coal plant like the Harrison Power Station.  That’s why FE wants to dump the plant on its Mon Power subsidiary so that WV rate payers can bail them out.

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