Morningstar | FirstEnergy Reports Strong 2Q; Revised FES Settlement Now Includes Unsecured Creditors
We are reaffirming our $40 per share fair value estimate and narrow moat rating after FirstEnergy reported strong second-quarter earnings, raised its 2018 earnings guidance, and reached an amended agreement with the creditors of FirstEnergy Solutions. Operating EPS was $0.62 in the recently ended quarter versus $0.44 in the same period last year. The strong results were driven by warm spring weather, strong industrial load growth, and a favorable court ruling on renewable energy credits in Ohio.FirstEnergy increased its 2018 earnings guidance to the upper end of its previous range of $2.25-$2.55 per share. Due in large part to the favorable year-to-date results and updated guidance, we have increased our 2018 earnings estimate to $2.50 per share from $2.40 per share. However, the increase in this year’s guidance did not have a material impact on our $40 fair value estimate.
Transmission capital expenditure guidance for 2018 was reaffirmed at $1.1 billion, but 2019-21 was increased to the top end of the previous guidance of $1 billion to $1.2 billion. We have increased the planned transmission investment in line with the updated guidance and estimate this segment will contribute over 29% of operating earnings excluding corporate and other by 2022. The additional investment in this wide-moat business supports FirstEnergy’s narrow moat.
FirstEnergy amended its original settlement agreement with FES creditors to include the unsecured creditors, adding about $130 million in payments to creditors. However, the revised agreement remains in line with the $2.7 billion of total compensation to FES creditors assumed in our fair value estimate.
For more detail, see our report "FirstEnergy Returns to Its Regulated Past."
FirstEnergy is a public utility holding company. The company and its subsidiaries are principally involved in the transmission, distribution and generation of electricity. The company's reportable operating segments are comprised of: Regulated Distribution, which distributes electricity through the company's utility operating companies and also controls regulated electric generation capacity located primarily in West Virginia, Virginia and New Jersey; and Regulated Transmission, which provides transmission infrastructure owned and operated by the transmission companies and certain of the company's utilities to transmit electricity from generation sources to distribution facilities.
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