Upcoming Transmission Projects With PJM And Partners Will Improve Future Energy Reliability

Key Takeaways

• Strategic transmission investments and partnerships could enhance infrastructure and support long-term earnings growth through expanded rate base and reliability improvements.
  
• Anticipated regulatory approvals and strategic plans, like Ohio's ESP VI, are likely to stabilize revenue and reduce regulatory risk, promoting consistent earnings growth.
  
• Frequent large storms increase costs and risk, challenging financial performance and operational stability amidst regulatory and shareholder value concerns.

Catalysts

Through its subsidiaries, generates, transmits, and distributes electricity in the United States.

• FirstEnergy's reaffirmed five-year CapEx plan of $26 billion through 2028, with a focus on reliability investments and PJM's regional transmission expansion plan, could drive substantial future revenue growth as the company enhances infrastructure.
  
• The joint development agreement with Dominion Energy Virginia and American Electric Power for regional transmission projects and the potential $3.8 billion investment in new transmission lines could significantly increase FirstEnergy's rate base, supporting long-term earnings growth.
  
• Anticipated regulatory approvals for rate adjustments, such as the $225 million settlement in Pennsylvania and expected new base rates in 2025, are likely to contribute to higher net margins and improved revenue stability.
  
• The planned Ohio electric security plan (ESP VI) aims to reduce regulatory risk and provide clarity on key rider provisions, aligning them with the Ohio base rate case, which could support consistent earnings growth.
  
• Participation in PJM's capacity auctions and strategic responses to large load requests, driven by data center growth and AI development, may enhance FirstEnergy's load growth outlook and potentially boost future revenues.

FirstEnergy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FirstEnergy's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $3.25) by about December 2027, up from $892.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.0x on those 2027 earnings, down from 25.9x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.8x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

FirstEnergy Future Earnings Per Share Growth

Risks

• Higher storm-related expenses that are not eligible for regulatory deferral may continue to impact operating margin negatively and contribute to unpredictable financial performance.
  
• Dilution from the 30% sale of FirstEnergy Transmission to Brookfield has reduced earnings per share, indicating potential decreases in shareholder value.
  
• Challenges with the Ohio Electric Security Plan (ESP) V, which include regulatory uncertainty and risks associated with switching back to ESP IV, can affect revenue stability and financial planning.
  
• Large-scale storms and extreme weather, which have been increasing in frequency, pose ongoing risks to operational efficiency and financial stability through increased maintenance costs.
  
• Potential increases in consumer electricity bills due to regional capacity auctions may impact customer demand and satisfaction, leading to revenue instability and potential regulatory challenges.

Valuation

• The analysts have a consensus price target of $46.56 for FirstEnergy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $41.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $15.2 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 5.9%.
• Given the current share price of $40.12, the analyst's price target of $46.56 is 13.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.