FirstEnergy Corporation



| FirstEnergy Corporation |(FE – NYSE) |$34.03* |

Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.

Reason for Report: 1Q18 Earnings Update

Prev. Ed: 4Q17 Earnings Update was done on Mar 28, 2018.

Broker’s Recommendations: Positive: 58.3% (7 firms); Neutral: 41.7% (5) Negative: 0.0 (0) Prev. Ed: 7, 5, 0

Brokers’ Target Price: $36.71 (( $2.02 from the last report: 7 firms) Brokers’ Avg. Expected Return: 7.88%

*Note: Though dated May 8, 2018; Share price and broker materials are as of Apr 30, 2018.

Note: A Flash Update was done on Feb 21, 2018 (4Q17 Earnings Results).

Note: We did not have access to broker reports with neutral rating.

Portfolio Manager Executive Summary

FirstEnergy Corp. is a diversified energy company headquartered in Akron, OH. Its subsidiaries and affiliates are involved in the generation, transmission, and distribution of electricity, as well as energy management and other energy-related services. The total capacity of the company’s power generation portfolio is roughly 16,000 megawatts (MW) sourced from coal, nuclear power, hydroelectric, wind and oil.

Of the 12 firms in the Digest group covering the stock, seven firms provided positive ratings and five assigned neutral ratings. The Zacks Digest target prices range from a low of $32.00 (6% downside from the current price) to a high of $41.0 (20.5% upside from the current price), with an average of $36.71 (( $2.02 from the previous report; 7.9% upside from the current price).

Positive or equivalent (58.3%; 7/12 firms): A few positive firms believe that the company’s strategy of settlement with a number of creditors in its bankruptcy, along with the recent proposal of raising its equity will substantially deleverage the risk faced by the company. The firms also believe that the company’s focus to shift towards the fully regulated business, predominantly The firms also believe that the company's plan of becoming fully regulated, being predominantly a wires utility company, will bring limitless investment opportunities related to aging infrastructure, new transmission needs, distribution enhancement and grid modernization.

Neutral or equivalent (41.7%; 5/12 firms):

May 8, 2018

Overview

The firms have identified the following issues to consider while evaluating FirstEnergy as an investment:

|Key Positive Arguments |Key Negative Arguments |

|Compliance Measures: FirstEnergy has undertaken a number of initiatives |Operational Risks: FirstEnergy’s generation, transmission and |

|to meet environmental regulations and mandates. |distribution facilities are subject to risks associated with the |

| |breakdown or failure of equipment or processes due to an aging |

|Balance Sheet: A strong balance sheet excellent operating performance |infrastructure. |

|and well-managed merchant power operations are growth drivers for the | |

|company. |Commodity Price Risk: FirstEnergy is exposed to financial and market |

| |risks resulting from the fluctuation in interest rates and commodity |

|Investment in Regulated Operation: Investments in regulated operation |prices – electricity, energy transmission, natural gas, coal, and |

|will drive performance, as the company exits from its competitive energy|nuclear fuel and emission allowances. |

|business completely and convert into a full regulated utility. | |

| |High debt levels: FirstEnergy’s debt/capital ratio stands at 69.42% |

|Massive Infrastructure Modernization: FirstEnergy is currently involved |compared with the industry average of 48.47% and the S&P 500’s 41.44%. |

|in a massive infrastructure modernization drive to boost its service |The high debt level amid the increasing interest rates, hurts margins |

|reliability. |and profitability. |

| | |

|Base rate Increase: FirstEnergy has been getting regulatory approvals | |

|for base rate increase. The company expects its Regulated Distribution | |

|rate to witness a compounded annual growth rate of 5% in the 2018-2021 | |

|time frame. | |

Headquartered in Akron, OH, FirstEnergy is a diversified energy company. Through its subsidiaries and affiliates, the company engages in the generation, transmission and distribution of electricity, as well as energy management and other energy-related services. Following its merger with Allegheny Energy Inc., the company operates in six states, namely, Ohio, Pennsylvania, New Jersey, New York, Maryland and West Virginia. FirstEnergy has the nation's largest investor-owned electric system. The service areas encompass approximately 65,000 square miles. Further, it serves a customer base of approximately 6 million in these regions.

FirstEnergy’s diverse generating fleet features non-emitting nuclear, scrubbed coal, natural gas, pumped storage hydro and other renewable energy plants. The company, along with its subsidiaries has a generating capacity in excess of 16,000 megawatts (MW) with more than 24,500 miles of transmission lines.

Of its generation asset portfolio includes approximately 58% of coal-fired capacity, 25% of nuclear capacity, 5% of oil and natural gas units and 12% of renewable.

FirstEnergy provides electricity services through its utility operating subsidiaries namely, Ohio Edison (OE), Cleveland Electric Illuminating Company (CEI), Toledo Edison (TE), Penelec (PN), Met-Ed (ME), Penn Power (PP), West Penn Power (WP), Jersey Central Power & Light (JCP&L), Monongahela Power Company (MP), The Potomac Edison Company (PE), American Transmission Systems, Inc. (ATSI), and Trans-Allegheny Interstate Line Company (TrAIL). The company sells energy and related products and services through its unregulated competitive subsidiaries — FirstEnergy Solutions Corp. (FES) and Allegheny Energy Supply Company, LLC (AE Supply). Further information on the company is available at its website: . FirstEnergy’s financial year ends on Dec 31.

May 8, 2018

Long-Term Growth

Management is committed to electric and gas service expansion strategies in its regulated service territories. The company's strong fundamentals include a regulated profile, a high-return non-regulated merchant power segment, a solid dividend and an excellent cost-control program. The company’s goal is to maximize the margin potential from each megawatt of electricity produced. It is well positioned to benefit from long-term power market trends such as steady supply/demand conditions.

FirstEnergy has shifted its focus toward regulated operations and has decided to dispose of non-profitable assets. In January 2018, the company announced $2.5 billion equity investments that supports the transition to a fully regulated utility company. In the coming years, the company plans to exit completely from its Competitive Energy Services and focus on its regulated operations, which offers more visibility to its earnings stream.

The company has created FE Tomorrow team to execute its plan of becoming fully regulated. The company aims to invest $10-$12 billion within 2018-2021 time period to strengthen its existing operations. Moreover, to bolster its balance sheet and reduce existing debts, the company is investing $2.5 billion for transformational equity. Out of the $2.5 billion equity issue, $1.62 billion will be in mandatory convertible preferred equity and $850 million in common equity. This will boost FirstEnergy to become a fully regulated utility company.

FirstEnergy is focusing on upgrading or replacing its existing meter technology with new Smart Meter Technology. Under this initiative, the company is targeted to install nearly 2.1 million of smart meter by 2021. The company is expected to create customer benefit of approximately $410 million by 2032, by incurring a cost of nearly $1.3 billion through 2032.

To provide efficient service for its customers, FirstEnergy, has undertaken initiatives like upgrading or replacing existing power lines, incorporating new smart technology into the grid and implementing security features. The company is planning to invest nearly $1-$1.2 billion annually through 2021 for these initiatives. FirstEnergy has plans to invest nearly $4.0 to $4.8 billion over the 2018-2021 time period to strengthen its transmission operation. The company expects transmission rate to improve at a compounded annual rate of 11% over the same time period.

FirstEnergy has been getting regulatory approvals for base rate increase. The company expects its Regulated Distribution rate to improve at a compounded annual rate of 5% over the 2018-2021 time frame. The expected hike in rates will help the company recover its investment and continue with its planned regulated investment. The company aims to invest nearly $5.7-$6.7 billion for strengthening its distribution network during the same time frame.

May 8, 2018

Target Price/Valuation

|Rating Distribution |

|Positive |58.3 % ( |

|Neutral |41.7% ( |

|Negative |0.0% |

|Avg. Target Price |$36.71 ( |

|Highest Target Price |$41.00 ( |

|Lowest Target Price |$32.00 ( |

|No. of Brokerage Firms with Target Price/Total |7/12 |

Key risks to the company’s realization of target price include regulatory burden associated with the implementation of pro-environment laws, commodity price sensitivity, interest rate sensitivity, and uncertainty regarding rate case approvals filed by the company.

Recent Events

On May 7, 2018, a subsidiary of FirstEnergy will energize a new 138-kilovolt transmission line and substation later this month to enhance service reliability for Ohio Edison and Toledo Edison customers across northern Ohio. The project includes a new transmission line that extends about 28 miles between existing substations in Erie and Sandusky counties.

On Apr 23, 2018, FirstEnergy reported first-quarter 2018 operating earnings of 67 cents per share, lagging the Zacks Consensus Estimate of 68 cents by 1.5%. Quarterly earnings improved 28.9% year over year and came in within the expected range of 60-70 cents.

On a GAAP basis, the company reported earnings of $2.54 per share compared with 46 cents in the prior-year quarter. The difference between GAAP and operating earnings in the reported quarter was due to the impact of one-time gain from the exit of competitive business.

Revenues

FirstEnergy generated total revenues of $2,976 million in first-quarter 2018, missing the Zacks Consensus Estimate of $3,262 million by 8.8%.

Revenues moved up 4.2% from $2,855 million in the year-ago quarter. The top line improved primarily on the back of higher regulated transmission and distribution revenues.

Production

Total electric delivery increased 5% year over year to 38,740 thousand megawatt-hours. Residential sales rose 8.1%, while commercial and industrial sales jumped 3.6% and 2.8% year over year, respectively.

Due to higher weather-related usage, distribution earnings in the reported quarter increased 6 cents from the year-ago quarter.

Margins

In first-quarter 2018, FirstEnergy incurred operating expenses of $2,379 million, up 6.8% from $2,227 million in the previous-year quarter. Operating income in the reported quarter came in at $597 million.

Earnings per Share

FirstEnergy reported first-quarter 2018 operating earnings of 67 cents per share, lagging the Zacks Consensus Estimate of 68 cents by 1.5%. Quarterly earnings improved 28.9% year over year and came in within the expected range of 60-70 cents. On a GAAP basis, the company reported earnings of $2.54 per share compared with 46 cents in the prior-year quarter. The difference between GAAP and operating earnings was due to the impact of one-time gain from the exit of competitive business.

Guidance

FirstEnergy reiterated its operating earnings guidance for 2018 in the range of $2.25-$2.55 per share. For the second quarter of 2018, earnings are estimated in the range of 47-57 cents. For the full year 2018, FirstEnergy provided its segmental guidance, Regulated Distribution and Regulated Transmission segment is expected to generate $2.11-$2.31 & 69-77 cents per share, respectively. Whereas, Corporate & Other segment is expected to incur loss of 53-55 cents per share.

Outlook

The firms with a positive outlook expect earnings to benefit from planned capital expenditure of $11 billion along with the total new equity of $2.9 billion.

| Research Analyst |Raj Karnani |

| Copy Editor |Promita Bhattherjee |

| Content Ed. |Jewel Saha |

| Lead Analyst |Jewel Saha |

| QCA |Jewel Saha |

| No. of brokers reported/Total brokers |12/12 |

| Reason for Update |1Q18 Earnings |

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