FirstEnergy To Look Externally for New CEO

Business Strategy & Outlook

FirstEnergy is moving past the scandal that linked the company with funds used in the former Ohio House speaker’s bribery scheme benefiting two nuclear plants FirstEnergy once owned as part of its former subsidiary, FirstEnergy Solutions. In 2021, FirstEnergy reached an agreement with the Department of Justice that required FirstEnergy to pay $230 million. The company recently entered into a RICO settlement for $37.5 million. An SEC investigation remains ongoing. Management has noted a loss is probable but can’t be reasonably estimated. One doesn’t expect the outcome to be material to the fair value estimate. The company also recently settled with intervening parties to resolve numerous open regulatory proceedings. Its three Ohio distribution utilities represent less than 20% of operating earnings. FirstEnergy’s underlying businesses are solid. The company’s regulated utilities are focused on accelerating investments that should result in solid earnings growth. The company’s $17 billion capital investment plan supports management’s 6% to 8% annual earnings growth target after incorporating moves to shore up the company’s balance sheet.

The company raised $3.4 billion, including $2.4 billion from selling a minority stake in subsidiary FirstEnergy Transmission and $1 billion from new market equity issued last year. The company is looking to further monetize a minority interest in a transmission or distribution asset, with proceeds likely to be used to deleverage its balance sheet. The FirstEnergy’s transmission businesses have favorable federal regulatory frameworks providing consistent returns above the cost of capital. Due to accelerating investments in transmission, these businesses will compose nearly 40% of rate base by 2026. FirstEnergy is also accelerating its investment in states with constructive regulatory frameworks that are likely to produce consistent realized returns above their cost of capital. Given the recent bribery scandal, FirstEnergy didn’t increase its dividend in 2021, and one doesn’t expect an increase in 2022. As per forecast a dividend increase in 2023 and the company achieving the midpoint of its earnings guidance range.

Financial Strengths

Total debt/adjusted EBITDA was over 5 times in 2018 but should gradually fall. The total debt/capital to decline from 85% at 2017 year-end to about 65% by 2026, as management’s balance sheet initiatives slowly improve credit metrics. The company raised $3.4 billion of equity, including $2.4 billion from a minority sale in its FirstEnergy Transmission subsidiary and $1 billion from new market equity issued last year. This should meet near-term equity needs to support the company’s $17 billion capital investment plan. Management is looking to further monetize a minority interest in a transmission or distribution asset, with proceeds likely to be used to deleverage its balance sheet. FirstEnergy didn’t increase its dividend in 2021 and plans no increase in 2022. The dividend to increase in 2023, with annual dividend increases of 6% by 2026.

Bulls Say

FirstEnergy’s narrow-moat businesses support operating earnings and roughly $17 billion of investment growth opportunities.
FirstEnergy is aggressively investing in electric transmission with most projects eligible to receive premium FERC-regulated returns.
Management is moving past missteps, allowing it to focus on investing and earning fair returns at its regulated utilities.

Company Description

FirstEnergy is one of the largest investor-owned utilities in the United States with 10 regulated distribution companies across six mid-Atlantic and Midwestern states. FirstEnergy also owns and operates one of the nation’s largest electric transmission systems with 24,000 miles of lines.

(Source: Morningstar)

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