BofA Downgrades FirstEnergy On Higher Pension Drag

With rising interest rates, FirstEnergy Corp. FE is poised to be negatively impacted by higher pension expenses, according to BofA Securities.

The FirstEnergy Analyst: Julien Dumoulin-Smith downgraded the rating for FirstEnergy from Buy to Neutral, while reducing the price target from $52 to $44.

The FirstEnergy Thesis: Management had guided to a potential pension headwind of 10 cents per share on earnings as of March 31, 2022, “while emphasizing that it was a preliminary estimate with mitigation opportunities from O&M reductions/timing,” Dumoulin-Smith said in the downgrade note.

The analyst added that FirstEnergy’s 2023 earnings could have a negative impact of around 20 cents per share, “prior to mitigation, double management’s guidance.”

“The situation has markedly deteriorated due to the broad decline in equities (~17%) and credit (~15%) YTD. As of mid-May, we now estimate that FE’s pension assets have declined -9%, down from -5.8% since 3/31,” Dumoulin-Smith wrote.

“With the backdrop of volatile equity, credit, and treasury markets, we think FE is unlikely to outperform lower risk peers given this underappreciated headwind,” he further stated.

FE Price Action: Shares of FirstEnergy had declined by 2.23% to $41.56 at the time of publication Monday, according to Benzinga Pro.

Photo: Courtesy of firstenergycorp.com