01—Abstract
Summary
Summary of the 10-K filed February 13, 2024. Cited figures are marked; the original filing is the authoritative source.
FirstEnergy's FY2023 10-K shows a fully regulated utility holding company in transition.
Net earnings attributable to FE were $1.10 billiona ($1.92 diluted EPS), up sharply from $406 million ($0.71) in 2022, but the improvement was driven largely by the absence of a $752 million deferred tax charge recorded in 2022 on the FET minority stake sale, not by stronger operations. Income from continuing operations was $1.12 billion versus $406 million, while Regulated Distribution earnings fell 23% to $740 million on mild weather, lower pension credits and higher interest costs. Regulated Transmission rose to $514 million on rate base growth.
Operating cash flow fell to $1.39 billionb from $2.68 billion, reflecting a $750 million voluntary pension contribution and working-capital and collateral outflows. Capital investment reached $3.7 billion, and management outlined about $26 billion of Energize365 spending from 2024 through 2028. The central near-term catalyst is the pending sale of an additional 30% of FirstEnergy Transmission (FET) to Brookfield for $3.5 billion, which would take Brookfield's stake to 49.9%.
It is expected to close by the end of Q1 2024, requires PPUC approval, and would produce roughly a $7.5 billionc tax gain offset largely by NOLs. Balance-sheet leverage is elevated: long-term debt is about $24.3 billion, short-term borrowings rose to $775 million, the interest coverage ratio is 4.45x against a 2.50x covenant, and Corporate/Other carries about $7.1 billion of holding-company debt. The company also faces significant legal and regulatory overhang from the HB 6 bribery scandal.
A $230 milliond DPA penalty was already paid, the DPA runs to about July 2024, and the SEC investigation is ongoing. Management states that a loss is probable in the SEC matter and in the securities class action, but neither is yet estimable. A February 2024 indictment of former PUCO chairman Randazzo and two former FirstEnergy officers adds to the uncertainty.
Regulatory outcomes remain pending as well, including the Ohio ESP V and grid modernization proceedings, and the Ohio base rate case is planned for 2024. For investors, the key trade-off is a visible capital investment and rate base growth story, supported by a 5% dividend increase to $0.41 per quarter, against elevated leverage, a rating in the BBB-/Ba1 area at the holding company, significant governance and legal risk, and a reliance on asset sales and regulatory approvals to fund the plan.
02—Key points
Key Highlights
- Reported EPS rose to $1.92 diluted (from $0.71), but the increase largely reflects the 2022 absence of a $752M deferred tax charge tied to the FET stake sale; continuing-operations earnings were $1.12B versus $406M.
- Regulated Distribution earnings fell $217M to $740M on weather-driven usage declines (heating degree days 14% below 2022), lower pension/OPEB credits, and PEER-related costs; Regulated Transmission earnings rose $153M to $514M on rate base growth.
- Operating cash flow dropped to $1.39B from $2.68B, mainly due to a $750M voluntary pension contribution, collateral return, and timing of transmission collections, while capex rose to $3.7B.
- Pending sale of an additional 30% of FET to Brookfield for $3.5B (Brookfield to reach 49.9%) is expected to close by end of Q1 2024, subject to PPUC approval, and would generate roughly a $7.5B tax gain largely offset by NOLs.
- Energize365 plan targets about $26B of capital investment from 2024 to 2028 (29% Distribution, 39% Integrated, 32% Stand-Alone Transmission), with capital forecasts rising from $4.3B in 2024 to $6.2B in 2028.
- HB 6 legal exposure remains significant: a $230M DPA penalty has been paid, the DPA runs to about July 2024, and management considers a loss probable in the SEC investigation and securities class action, though neither is yet reasonably estimable.
- Leverage is elevated, with long-term debt of about $24.3B, $775M of short-term borrowings, and a 4.45x interest coverage ratio versus a 2.50x covenant; the dividend was raised 5% to $0.41 per quarter.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2023filed February 13, 2024Financial Statements
FY2023 against FY2022
| Line item | FY2023FY2022 | Change |
|---|---|---|
| Revenue | $12.87B$12.46B | +3.3% |
| Operating Expenses | $10.60B$10.55B | +0.5% |
| Operating Income | $2.27B$1.91B | +18.6% |
| Interest Expense | $1.12B$1.04B | +8.2% |
| Net Income | $1.10B$406.00M | +171.4% |
| EPS (Basic) | $1.92$0.71 | +170.4% |
| EPS (Diluted) | $1.92$0.71 | +170.4% |
| Shares Outstanding (Basic) | 573.00M571.00M | +0.4% |
| Shares Outstanding (Diluted) | 574.00M572.00M | +0.3% |
05—Questions
Frequently Asked Questions
Why did FirstEnergy's EPS improve so much in 2023, and is that improvement sustainable?
Diluted EPS rose to $1.92 from $0.71, but most of the swing reflects the absence of a $752M deferred tax charge recorded in 2022 on the initial 19.9% FET stake sale, plus lower Corporate/Other losses. Underlying Regulated Distribution earnings actually declined 23%, so the comparison flatters the year. Sustainable growth depends mainly on Regulated Transmission rate base expansion and on weather normalization.
What is the status of the Brookfield FET stake sale and why does it matter?
FE agreed to sell an incremental 30% of FET to Brookfield for $3.5B, with most proceeds in cash at closing and the remainder in a promissory note due by end-2024. Closing is expected by end of Q1 2024 and requires PPUC approval; FERC, VSCC and CFIUS approvals were already obtained. The transaction is important because it funds the capital plan and reduces leverage at the holding company, while FE retains 50.1% control and continued consolidation.
How significant are the HB 6 investigations and litigation to the company's finances?
The $230M DPA penalty was already paid and is not recoverable from customers. Management states that a loss is probable in the SEC investigation and the In re FirstEnergy securities class action, but it cannot yet estimate the amount, so no contingency has been recorded for those matters. A February 2024 indictment of former officers and a former PUCO chairman, plus pending Ohio PUCO proceedings, add uncertainty to rates and reputation, and a DPA breach could trigger credit agreement defaults.
What are the main balance-sheet and liquidity risks for investors?
Long-term debt is about $24.3B and short-term borrowings rose to $775M. Holding-company debt is about $7.1B. Available external liquidity was about $4.6B as of February 2024. Interest coverage was 4.45x against a 2.50x minimum. Floating-rate credit facility debt is unhedged, and a further downgrade (FE is at BBB-/Ba1) would raise borrowing costs and collateral requirements. Pension funding is largely deferred, with the next required contribution not expected until 2028.
What regulatory outcomes should investors watch in 2024?
Key items include the JCP&L base rate settlement ($85M increase, expected June 2024), the MP/PE West Virginia base rate case (settlement of $105M, order expected Q1 2024), the Ohio ESP V and Grid Mod II proceedings, the PA Consolidation and FET transaction approvals, and the Ohio base rate case planned for Q2 2024. Outcomes will determine how much of the $26B Energize365 plan earns timely returns and how the company's authorized ROEs, which are mostly settled rather than litigated, compare with actual earned ROEs that remain well below allowed levels in several states.
06—Continue