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Why Highbridge Capital sells stake in FirstEnergy Corp.

Must-know: Highbridge Capital Management’s 2Q14 positions (Part 7 of 9)

(Continued from Part 6)

Highbridge Capital Management and FirstEnergy Corp.

Highbridge Capital traded notable positions in the second quarter. It initiated new stakes in Valeant Pharmaceuticals (VRX), International Business Machines (or IBM), PVH Corp. (or PVH), and Tyson Foods Inc. (or TSN). During 2Q14, the fund also sold its shares in Celgene Corp. (CELG), FirstEnergy Corp. (FE), Advance Auto Parts Inc. (AAP). and Eli Lilly & Co. (LLY).

Highbridge Capital exited its position in FirstEnergy Corp. (FE). FirstEnergy Corp. accounted for 0.64% of the fund’s first quarter portfolio.

Company profile

FirstEnergy Corp. is headquartered in Akron, Ohio. It holds, directly or indirectly, of all of the outstanding common stock of its principal subsidiaries. It’s a diversified energy company that’s dedicated to safety, reliability, and operational excellence.

The company’s ten regulated distribution companies form one of the nation’s largest investor-owned electric systems. Its diverse generating fleet produces ~85 million megawatt-hours of electricity annually. It has a fleet of non-emitting nuclear, scrubbed coal, natural gas, and hydro plants.

Its transmission operations include 20,000 miles of high-voltage lines and three regional transmission operation centers. FirstEnergy Solutions Corp. (or FES) is a leading energy supplier. It serves residential, commercial, and industrial customers in the Northeast, Midwest, and Mid-Atlantic regions.

Financial performance

FirstEnergy announced 2Q14 basic operating—non-generally accepted accounting principles (or GAAP)—earnings of $0.49 per share of common stock. This compares to basic operating earnings of $0.59 per share of common stock in 2Q13. This reflects a lower commodity margin at the competitive business, higher operating expenses—mainly in the Regulated Distribution segment.

It also reflects higher expenses related to benefits, depreciation, and interest. It’s partially offset by higher transmission revenues, investment income, capitalized financing costs, a lower effective tax rate, and a benefit from the impact of the West Virginia asset swap.

Operating earnings from the company’s distribution business decreased compared to 2Q13. The decrease was due to an increased focus on maintenance and vegetation management work this year.

The transmission business’ operating earnings increased as a result of higher revenues and capitalized financing costs related to the company’s Energizing the Future transmission investment program.

Operating earnings from the Competitive Energy Services segment were impacted by a lower commodity margin, higher investment income, and lower retail operations and maintenance expenses. The decrease in the commodity margin was due to lower energy prices at the time the sales were committed. It was also due to lower contract and wholesale sales volumes. Compared to 2Q13, total contract sales fell 6% and the total number of retail customers decreased slightly. The reflected the company’s more selective retail strategy.

Company outlook

On its earnings call, the company stated that on July 15, 2014, Moody’s gave the company a senior unsecured rating of Baa3. It revised the outlook to stable from negative. Moody’s gave Allegheny Energy (or AE) a senior unsecured rating of Baa3. It upgraded the long-term ratings of six of company’s utility subsidiaries to stable—except for Jersey Central Power & Light Company.

In the next part of the series, we’ll discuss why Highbridge Capital exited Advance Auto Parts.

Continue to Part 8

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