FirstEnergy reported earnings last Tuesday, beating on both top and bottom lines. But what should've been a day to celebrate for FirstEnergy shareholder ended with a 1% dip in share prices. Let's take a deeper look to see why this dividend stock didn't deliver.

Number crunching
FirstEnergy sales clocked in at $3.7 billion for Q1 2012, 1.1% above analyst expectations but 5.8% below 2012's first quarter. But falling sales are a sectorwide issue, and FirstEnergy's bottom line is what matters most to investors.

The utility's adjusted EPS hit $0.76, a solid 10.1% higher than analysts' prediction. But as with sales, an adjusted EPS comparison to Q1 2012 still shows an overall slump, down 7.3%. 


Looking ahead, FirstEnergy confirmed its 2013 guidance of $2.85 to $3.15 adjusted EPS.

Did FirstEnergy's fundamentals come second?
FirstEnergy has been hard at work making headway on a retail strategy to balance its books and improve liquidity to keep its investment grade tip-top. And while the utility has managed to increase its customer base by a whopping 42%, sales margins tightened their grip this quarter. Commodity pricing is out of FirstEnergy's control, and a margin squeeze in its unregulated business pushed overall EPS down a whopping $0.14 for this dividend stock.

FirstEnergy wasn't the only utility to feel the burn from backwards hedges. Exelon took a one-time $235 million hit this quarter as natural gas prices unexpectedly headed higher. Likewise, PP&L's generation unit EPS fell more than 50%, primarily because of trimmed hedged wholesale prices. Meanwhile, Ameren is defying traditional diversity by exiting the generation business and relying entirely on regulated sales for revenue. While this might cause the utility to lag when margins expand, it safeguards earnings and keeps this dividend stock sustainable no matter where commodity prices head.

But even if FirstEnergy hit a hard spot with bad hedges, rising natural gas prices bode well for this utility's energy portfolio. The power company counts on coal for 64% of its capacity, with nuclear responsible for an additional 18%.

Source: FirstEnergycorp.com 

After suffering from cost competitiveness worries over the past few years, a gas-price increase could mean new futures for these fuels.

Can debt kill this dividend stock?
Alongside growth opportunities and retail strategy, FirstEnergy has highlighted its debt as a serious focus for 2013. Through a series of notes issuances and buybacks, FirstEnergy has dropped its competitive business' debt by $1.5 billion. Its debt-to-equity ratio currently clocks in at 1.6, below the industry's 2.2 average but significantly higher than the likes of Exelon's 0.94 ratio.

The utility is also taking a page of out NextEra Energy's book through its planned sale of 1,240 MW of hydro assets by 2014. NextEra offloaded its final 351 MW of hydro assets in March, enabling the company to focus on "areas with greater growth potential." FirstEnergy's and NextEra's exits are hardly anomalies, as various utilities concentrate their assets to cut costs and maximize economies of scale.

Can FirstEnergy finish first?
FirstEnergy share prices are up just 2.75% for 2013, compared with a 14.16% rise for the Dow Jones U.S. Utilities Index. With only 6% natural gas capacity, this utility's generation portfolio is well protected from gas-price increases. And although this dividend stock offers a 5.1% yield, a heavy payout won't do its book-balancing any favors.

Despite FirstEnergy's positive earnings report, its share price currently places this utility out of my investment comfort zone. Looking ahead, investors should keep an extra close watch on margins. If FirstEnergy can keep costs lower as its booming customer base demands more electricity, its priced-for-perfection shares may match my expectations.

As the nation moves increasingly toward clean energy, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. This strength, combined with an increased focus on balance sheet health and its recent merger with Constellation, places Exelon and its resized dividend on a short list of the top utilities. To determine whether Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.

The article FirstEnergy Earnings: Will Debt Destroy This Dividend Stock? originally appeared on Fool.com.

Motley Fool contributor Justin Loiseau has no position in any stocks mentioned, but he does use electricity. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo. The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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