FirstEnergy Earnings: Successful Completion of Regulatory Calendar Key to Earnings Growth

We are reaffirming our $40 per share fair value estimate after FirstEnergy FE reported third-quarter earnings of $0.88 per share, up from $0.79 per share in the same year-ago period.

Management narrowed its 2023 operating EPS guidance to $2.49 to $2.59 from $2.44 to $2.64. Increasing our full-year estimate within the new range will not have a material effect on our fair value estimate. Our narrow moat remains unchanged.

The company also reaffirmed its long-term 6% to 8% earnings guidance, and we continue to expect the company to earn in the bottom half of that range. Plans to invest $12 billion over the next three years support earnings growth. FirstEnergy resumed dividend growth with a 5% dividend increase. This is the first dividend increase since 2020, and we expect future dividend growth to be in line with earnings growth.

Achieving supportive regulatory outcomes across its jurisdictions will be important to increase its regulated utilities’ returns, which remain significantly below allowed returns, and support earnings growth. Pending rate cases in New Jersey, West Virginia, and Maryland should help narrow the gap between earned and allowed returns. Base rate cases in Pennsylvania and Ohio will be filed in the first half of 2024.

Regulatory risk in Ohio continues, with no new updates on the previously disclosed subpoena from the Ohio Attorney General’s organized crime and corrupt activities unit. The activities are covered under the previously agreed-to deferred prosecution agreement.

Earnings in the quarter benefited from higher rates and capital investments, lower operating costs, and income tax benefits. These benefits were partially offset by unfavorable weather, higher interest costs, and increased pension expense.