We are lowering our fair value estimate for FirstEnergy (FE) to $40 per share from $41 as we now believe the renewal of the Distribution Modernization Rider in Ohio is unlikely and strong industrial sales growth will slow with the decline in oil prices. We lowered our 2020 operating earnings estimates by about $0.18 per share due to the combination of these more bearish assumptions.
However, we forecast consolidated EPS growth following the 2020 EPS reset should average about 5.5% per year. This is primarily driven by FERC-regulated transmission earnings growth averaging almost 10% annually due to almost $6 billion of investment in this wide-moat business during the next five years.
On Nov. 9, FirstEnergy announced a 5.6% dividend increase for the 2019 first quarter. Although we were not surprised that FirstEnergy began increasing its dividend following the successful separation from bankrupt FirstEnergy Solutions, the timing of the increase was a year earlier than we forecast.
The earlier increase and the expected 2018 strong earnings performance indicates FirstEnergy's year-end balance sheet will likely be stronger than we thought, and Ohio regulators will certainly take notice. In our opinion, this will make it less likely that the DMR will be extended beyond 2019 as the purpose of the rider was to assist FirstEnergy in strengthening its balance sheet following the FES bankruptcy.
Industrial sales growth has been a positive over the past two years driven in part by businesses supporting shale gas, tight oil exploration and production, and the steel sector. FirstEnergy recently projected industrial sales growth averaging 8% annually in West Virginia from 2018-21. However, with oil prices declining below $50 per barrel and our midcycle natural gas price unchanged at $3.00 per million btu, we believe the strength of FirstEnergy’s industrial sector sales growth will be modestly weaker than we previously expected.
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Charles Fishman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.