FirstEnergy Earnings: Warm Weather Presents Headwinds

We are reaffirming our $40 fair value estimate for FirstEnergy FE after the company reported first-quarter earnings per share of $0.60, flat with the year-ago period. Management reaffirmed its 2023 operating EPS guidance of $2.44-$2.64, in line with our expectations. Our narrow moat and stable moat trend ratings are unchanged.

Earlier this month, FirstEnergy announced that Brian Tierney will become CEO effective June 1. Overall, we think he is a solid choice. Tierney has significant utility experience, previously working for 23 years at American Electric Power. As CFO at AEP, he set and achieved financial goals with clear communication to the financial community, in our view. Before his time as CFO, he was executive vice president of AEP Utilities East, which included Ohio.

Tierney will need to work through the regulatory process to improve FirstEnergy’s earned regulatory returns, which remain well below allowed returns. FirstEnergy has filed numerous rate cases across its territories to improve returns and receive recovery for investments and operating expenses.

While some of the company’s regulatory jurisdictions can be challenging, overall we expect constructive outcomes. Execution on the $19 billion capital investment plan supports our expectation that FirstEnergy will be at the low end of management’s 6%-8% earnings growth target through 2025. We also expect Tierney and the board to revisit the dividend later this year and resume growth by the end of the year.

In the first quarter, EPS came in at $0.12, negatively affected by weather as heating degree days were 19% below normal. Near-term weather volatility has no effect on our fair value estimate. Higher pension expense also dragged on earnings. Offsetting these negatives were operating expense savings, investments related to improved customer demand, and earnings from FirstEnergy’s minority investment in Signal Peak.