FE - Fundamentals, Financials, History, and Analysis
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FirstEnergy Corp. (FE) is a leading electric utility company that has been providing reliable and affordable power to customers across the Midwest and Mid-Atlantic regions for decades. With a long history of innovation and a steadfast commitment to customer service, FirstEnergy has established itself as a premier player in the utility industry.

Company Overview

Established in 1996 through the merger of Ohio Edison, Centerior Energy, and Allegheny Energy, FirstEnergy has grown to become one of the largest investor-owned electric systems in the United States, serving over 6 million customers across Ohio, Pennsylvania, New Jersey, West Virginia, Maryland, and New York. The company operates through three primary business segments: Distribution, Integrated, and Stand-Alone Transmission, each of which plays a crucial role in delivering electricity to households and businesses.

FirstEnergy's principal business is the holding, directly or indirectly, of all outstanding equity of its principal subsidiaries, which include Ohio Edison Company, The Cleveland Electric Illuminating Company, Toledo Edison Company, FirstEnergy Pennsylvania Electric Company, Jersey Central Power & Light Company, FirstEnergy Service Company, Monongahela Power Company, and The Potomac Edison Company.

Legal Challenges and Resolutions

In July 2020, FirstEnergy faced legal challenges when it received subpoenas for records from the U.S. Attorney's Office for the Southern District of Ohio related to an investigation into former Ohio House Speaker Larry Householder and other individuals and entities allegedly affiliated with him. This led to a significant development in July 2021, when FirstEnergy entered into a three-year Deferred Prosecution Agreement with the U.S. Attorney's Office to resolve the matter. As part of this agreement, FirstEnergy paid a $230 million criminal monetary penalty.

The company's legal issues continued into 2022, with FirstEnergy, acting through a Special Litigation Committee, agreeing to a settlement in February to resolve multiple shareholder derivative lawsuits related to the allegations against Householder and others. This settlement included a series of corporate governance enhancements and a $180 million payment to FirstEnergy.

Financial Performance

FirstEnergy's financial performance has been a testament to its operational efficiency and strategic investments. In 2024, the company reported GAAP earnings of $1.70 per share and operating (non-GAAP) earnings of $2.63 per share, which were within the forecasted guidance range. This strong performance was driven by the successful implementation of new rates and investments in the company's regulated businesses, as well as its continued focus on cost management and operational excellence.

For the fiscal year 2024, FirstEnergy reported revenue of $13.47 billion, net income of $978 million, operating cash flow of $1.85 billion, and free cash flow of -$1.11 billion. In the most recent quarter (Q4 2024), the company achieved revenue of $3.18 billion, net income of $261 million, operating cash flow of $740 million, and free cash flow of -$250 million. Year-over-year, revenue increased by 4.6%, net income grew by 17.1%, and operating cash flow rose by 23.7%, while free cash flow decreased by 77.8%.

The revenue increase was primarily attributed to higher customer demand and new base rates in the Integrated segment. The growth in net income was due to lower operating expenses, partially offset by higher interest expenses. The significant decrease in free cash flow was a result of higher capital investments as part of the company's strategic growth initiatives.

Regulatory Progress

One of the key highlights of 2024 was FirstEnergy's significant progress in its regulatory program. The company has now completed rate reviews in four of its five states since the fourth quarter of 2023, derisking 83% of its rate base when including transmission formula rate investments. The approved rate cases in Maryland, West Virginia, New Jersey, and Pennsylvania have resulted in a net annual revenue increase of approximately $450 million, allowing FirstEnergy to make the necessary investments to strengthen and modernize its grid.

Liquidity and Balance Sheet Strengthening

In addition to its regulatory achievements, FirstEnergy has also made significant strides in strengthening its balance sheet and financing its growth initiatives. The successful completion of the sale of an incremental 30% equity interest in FirstEnergy Transmission (FET) in March 2024 was a transformative milestone for the company, marking the final phase of its $7 billion multi-year effort to improve its financial position. This transaction, along with the company's focus on maintaining investment-grade credit ratings, has enabled FirstEnergy to fund its comprehensive capital investment program, Energize365, which aims to create a smarter, more reliable grid.

As of September 30, 2024, FirstEnergy's debt-to-equity ratio stood at 1.93x, with $439 million in cash on hand. The company had access to $5.9 billion across various revolving credit facilities as of October 28, 2024. FirstEnergy's current ratio was 0.56, and its quick ratio was 0.45, indicating a focus on maintaining adequate liquidity to support its operations and investment plans.

Strategic Investments

FirstEnergy's Energize365 program is a key component of the company's strategy, with a planned investment of $28 billion from 2025 through 2029, an 8% increase from its previous five-year plan. This investment will drive a 9% compounded annual rate-base growth during the period, supporting the company's commitment to improving grid reliability, enhancing system resiliency, and enabling the energy transition.

For 2025, FirstEnergy plans to invest $5 billion in its regulated properties, representing an 11% increase over 2024. This investment is part of the company's broader $28 billion Energize365 investment program, which is expected to drive a 9% compound annual growth rate (CAGR) in rate base from 2025 through 2029.

Financial Outlook

Turning to the company's financial outlook, FirstEnergy has introduced a new metric called "core earnings," which excludes the volatile contributions from its pension plan and Signal Peak mining investment. For 2025, the company is guiding to a core earnings per share range of $2.40 to $2.60, representing a 5.5% growth from the 2024 core earnings of $2.37 per share. This guidance accounts for the impact of higher financing costs, the removal of a 50-basis point incentive from ATSI transmission rates, and the Ohio DCR revenue caps, among other factors.

Looking ahead, FirstEnergy is targeting a core earnings compounded annual growth rate of 6% to 8% through 2029, supported by its robust $28 billion Energize365 investment program. The company's commitment to financial discipline and operational excellence, coupled with its constructive regulatory relationships, position it well to deliver sustainable growth and value to its shareholders.

FirstEnergy does not anticipate the need for additional equity beyond its ongoing employee benefit programs to finance its investment plan. The company is targeting a dividend payout ratio of 60% to 70% of core earnings over the planning period, with an anticipated annual dividend declaration of $1.78 per share in 2025.

Business Segments and Operations

FirstEnergy operates through three primary reportable segments: Distribution, Integrated, and Stand-Alone Transmission.

The Distribution segment, which represented $10.9 billion in 2023 rate base, consists of the Ohio Companies (CEI, OE, and TE) and FE PA. This segment distributes electricity to approximately 4.2 million customers across Ohio and Pennsylvania and purchases power for its provider of last resort, standard service offer, and default service requirements.

The Integrated segment, representing $8.7 billion in 2023 rate base, includes the distribution and transmission operations under JCPL, MP, and PE, as well as MP's regulated generation operations. This segment serves around 2 million customers in New Jersey, West Virginia, and Maryland, provides transmission infrastructure in those states and Virginia, and operates 3,600 MW of regulated net maximum generation capacity primarily located in West Virginia and Virginia. The segment also includes MP and PE's 50 MW of solar generation at five sites in West Virginia, with the first two sites totaling 24 MW placed in-service in 2024.

The Stand-Alone Transmission segment, consisting of FE's ownership in FET and KATCo and representing $7.7 billion in 2023 rate base, includes transmission infrastructure owned and operated by the Transmission Companies. The segment's revenues are primarily derived from forward-looking formula rates, which update the revenue requirement annually based on projected rate base and costs, subject to an annual true-up.

Industry Trends and Competitive Landscape

The electric utility industry in the Midwest and Mid-Atlantic regions is experiencing a compound annual growth rate (CAGR) of 4-6%. This growth is driven by increasing customer demand, grid modernization investments, and the ongoing transition to renewable energy sources. FirstEnergy's strategic focus on investing in its regulated operations, improving reliability, and enhancing the customer experience through its $26 billion Energize365 program positions the company well to capitalize on these industry trends.

Conclusion

Despite some near-term headwinds, FirstEnergy's long-term outlook remains bright. The company's focus on investing in its core regulated operations, maintaining a strong balance sheet, and fostering a culture of continuous improvement positions it well to capitalize on the evolving energy landscape and provide reliable, affordable power to its customers for years to come. With its strategic Energize365 investment program, strong regulatory relationships, and commitment to operational excellence, FirstEnergy is well-positioned to deliver sustainable growth and value to its shareholders while meeting the evolving needs of its customers and communities.

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