FirstEnergy Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2024

There are 12 speakers on the call.

Operator

Hello, and welcome to the FirstEnergy Corp. First Quarter 20 24 Earnings Call. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Irene Prezel, Vice President, Investor Relations and Communications.

Operator

Please go ahead, Irene.

Speaker 1

Thank you. Good morning, everyone, and welcome to FirstEnergy's Q1 2024 earnings review. Our President and Chief Executive Officer, Brian Tierney, will lead our call today and he will be joined by John Taylor, our Senior Vice President and Chief Financial Officer. Our earnings release, presentation slides and related financial information are available on our website at firstenergycorp.com. Today's discussion will include the use of non GAAP financial measures and forward looking statements.

Speaker 1

Factors that could cause our results to differ materially from those forward looking statements can be found in our SEC filings. The appendix of today's presentation includes supplemental information along with the reconciliation of non GAAP financial measures. Now it's my pleasure to turn the call over to Brian.

Speaker 2

Thank you, Irene. Good morning, everyone. Thank you for joining us today and for your interest in FirstEnergy. This morning, I will review financial performance and highlights for the Q1, provide some updates on key regulatory developments and review FirstEnergy's shareholder value proposition. For the Q1, FirstEnergy delivered GAAP earnings of $0.44 per share compared to $0.51 per share in 2023.

Speaker 2

Operating earnings were $0.55 per share, dollars 0.02 higher than the midpoint of guidance for the quarter versus $0.60 per share last year. It is important to note that higher revenues from investments to better serve our customers and more favorable weather compared to last year were offset by higher planned O and M expenses and the expected decrease in signal peak earnings resulted in higher quality utility earnings for the quarter. John will provide additional details later in the call. During the last earnings call, we announced our 5 year $26,000,000,000 investment program to better serve our customers, branded as Energize 365. That plan combined with our ongoing regulatory updates and our continuous improvement program give us the confidence to affirm our 6% to 8% long term operating growth rate.

Speaker 2

We are also affirming our operating earnings guidance range of $2.61 to $2.81 per share for 2024. We are providing guidance of $0.50 to $0.60 per share for the Q2 of this year. Our confidence in the future gave us the opportunity to increase our dividend again to $0.425 per share payable in June. On an annual basis, this would represent an increase of 6.25 percent versus dividends declared in 2023. We are continuing to make progress on recruiting and hiring executives to run our 5 primary businesses.

Speaker 2

We expect to make announcements in the near term. Earlier this month, we announced the hiring of John Combs as our Senior Vice President of Shared Services. John was most recently an SVP and Chief Technology Officer at JPMorgan Chase. John's deep background in technology and leadership as well as his financial acumen make him the perfect person to lead our IT, supply chain, flight operations and corporate and cybersecurity organizations. We are thrilled to welcome John to the team.

Speaker 2

On March 25, FirstEnergy closed on the final phase of our multi year $7,000,000,000 equity raise to improve our balance sheet and fuel our growth. We received $2,300,000,000 of the $3,500,000,000 proceeds with the balance in interest bearing notes that are expected to be repaid this year. We are excited to have Brookfield as our partner in the fast growing transmission segment of our business. The impact of this transaction on FirstEnergy as the final phase of the $7,000,000,000 equity raise cannot be overstated. The total equity on the balance sheet increased 25% in the 3 months ended March 31.

Speaker 2

That's truly remarkable for a company of FirstEnergy size. For the first time in this company's history, we are fully regulated, mostly wires with a strong balance sheet that enables organic investment in our utility companies to improve reliability and our customers' experience. Following the closing of the transaction, Moody's recognized the impact of the company by upgrading FirstEnergy Corp. Senior unsecured rating to investment grade. On Tuesday, S and P upgraded FirstEnergy's corporate credit rating to BBB and our senior unsecured rating to investment grade with a positive outlook.

Speaker 2

The balance sheet strength and clean business model represented on this slide capture a lot about what excited me to come to FirstEnergy. Let me provide some updates on key regulatory initiatives. People have asked us how they will know when we are making progress on our regulatory plan. I tell them to look for milestones where we are getting fair and reasonable regulatory outcomes. During the quarter, we proved that we can obtain constructive regulatory outcomes across our jurisdictions.

Speaker 2

We received approval of our rate case settlement in New Jersey authorizing a 9.6% ROE and a 52% equity capitalization ratio. Even with this increase, JCP and L's rates remain 26% below our in state peers. The West Virginia Public Service Commission approved constructive depreciation and base rate case settlements. In addition, they approved an expanded net energy fuel charge settlement for recovery of about $250,000,000 through 2026 with no disallowances. For investors looking for milestones that FirstEnergy can obtain fair and reasonable regulatory outcomes, we provided several examples during the quarter.

Speaker 2

John will provide additional detail on the results in his remarks. For the balance of the year, we have an active regulatory schedule. In Ohio, we filed a settlement in our Grid Mod 2 case asking for the opportunity to complete our advanced meter infrastructure rollout over 4 years. A hearing is scheduled for June 5. Approval of this non controversial settlement will bring us to parity with our in state peers.

Speaker 2

We are expecting approval of our ESP-five filing this quarter and we will file a base rate case next month. That case will seek a modest increase in base rates, but will reset a number of riders since the last base rate case. Earlier this month in Pennsylvania, we filed a base rate case requesting an 11.3% ROE and a 53.8 percent equity ratio. We expect a decision in December with rates effective in January of next year. Before I turn the call over to John, I would like to highlight the value proposition that FirstEnergy offers to shareholders.

Speaker 2

We have completed the multiyear overhaul of our balance sheet and have achieved investment grade status at both Moody's and S and P. Our strong balance sheet differentiates FirstEnergy from many of our industry peers and that we do not anticipate incremental equity needs to fund our $26,000,000,000 investment plan. Our long term annual operating earnings growth rate combined with our dividend yield represent a total shareholder return potential of 10% to 12%. Our earnings quality is vastly improved driven by growth in our core regulated businesses and our customers' affordability remains strong throughout the investment period. At the end of a significant business transition led by our Board of Directors and management team, FirstEnergy represents a high quality and attractive risk value proposition to our shareholders.

Speaker 2

With that, I will turn the call over to John.

Speaker 3

Thank you, Brian, and good morning, everyone. Despite another mild winter, we are off to a good start this year with strong execution and financial discipline from our team that resulted in operating earnings above the midpoint of our guidance. And we are reaffirming our full year operating earnings guidance range of $2.61 to $2.81 a share, which represents a 7% increase versus the midpoint of our 2023 guidance. Today, I'll review financial performance for the quarter, our progress on key strategic regulatory initiatives and close with some details around the balance sheet. Looking at our financial performance for the quarter, operating earnings were $0.55 a share, which is above the midpoint of our guidance despite the mild temperatures this winter that impacted retail sales and includes a planned increase in operating expenses as discussed on the Q4 call.

Speaker 3

This compares to 2023 1st quarter operating earnings of $0.60 a share. As we also mentioned on the 4th quarter call, earnings growth this year will be back end loaded given the effective dates of rate cases in West Virginia and New Jersey and planned increases in operating expenses in the first half of this year associated with the timing of maintenance work. Our first quarter results are detailed in the strategic and financial highlights document we posted to our IR website last night. At a consolidated level, 1st quarter earnings of $0.55 per share were impacted by higher and improved earnings quality from an expected decrease in earnings from signal peak, partially offset by increases from new base rates and rate based growth in formula rate programs. And although customer demand was not a significant driver year over year given the mild winter in the first quarter of 2023.

Speaker 3

Retail sales were down 6% versus plan, primarily associated with heating degree days that were 14% below normal, impacting results by $0.07 a share versus our plan. But let's also take a few minutes to review our segment results, which you will notice in our filings and presentation, the segment reporting change consistent with how we're managing the business. We are now organized into easy to follow segments of distribution, integrated, stand alone transmission and corporate. This streamlined and transparent reporting places entire companies in individual segments, simplifying reporting and eliminating reconciliations. In our distribution business, operating earnings were $0.30 a share versus $0.33 per share in the Q1 of last year, impacted largely by the planned increase in operating expenses I mentioned earlier, specifically around vegetation management work, partially offset by an increase in rates from capital investment programs and lower rate credits in Ohio.

Speaker 3

In our integrated segment, operating earnings were $0.15 a share compared to $0.14 per share in the Q1 of last year. Results increased largely due to the implementation of base rates in all three jurisdictions in this business and rate based growth in formula rate programs, including integrated transmission investments, partially offset by planned increases in operating expenses. In our standalone transmission segment, operating earnings were $0.18 a share versus $0.17 per share in the Q1 of 2023, resulting from a 9% year over year rate base growth from our formula rate transmission capital investment program. And finally, in our corporate segment, losses were $0.08 per share versus $0.04 per share in the Q1 of 2023, primarily reflecting the lower planned earnings contribution from our 1 third ownership interest in the Signal Peak Mining operation, decreasing from $0.08 per share in the Q1 of last year to $0.03 per share in the Q1 of this year. Turning briefly to capital investments.

Speaker 3

First quarter CapEx totaled just under $900,000,000 an increase of nearly 22% versus 2023 levels and slightly ahead of our plan across each of our businesses focusing on grid modernization, transmission and infrastructure renewal investments. As a reminder, CapEx for this year is planned at $4,300,000,000 versus $3,700,000,000 in 2023. Turning to regulatory activity, we are very pleased with the outcomes in the recent base rate case orders consistent with our plan that allows for solid regulated returns for our investors while keeping rates affordable for customers. And we're committed to our customers and our communities to enhance reliability performance and support the energy transition through our Energize 365 capital investment program. As Brian mentioned, in mid February, the New Jersey BPU issued a final order on JCP and L's base rate case.

Speaker 3

The new rates, which customers will see effective June 1 and continue to be well below our in state peer average represent an $85,000,000 rate adjustment on rate base totaling $3,000,000,000 an ROE of 9.6% and a 52% equity capitalization ratio. And we are currently working through our energized New Jersey infrastructure improvement proposal initially filed in November, including over $900,000,000 in capital investments over 5 years aimed to enhance reliability and modernize the distribution system. In West Virginia, on March 26, we received a final order from the Public Service Commission on our base rate case with rates effective March 27. The case resulted in $105,000,000 rate adjustment on rate base of $3,200,000,000 and allowed ROE of 9.8% and a 49.6 percent equity ratio. Rates for our West Virginia customers remain about 22% below our in state peers.

Speaker 3

Additionally, as Brian mentioned, in West Virginia, we received an order on our E and EC case for an increase of $55,000,000 we have been successful in reducing the $255,000,000 deferral down to $168,000,000 with full recovery expected by 2026. Now let's move on to current activity with Pennsylvania. Earlier this month, we filed a base rate case requesting a $502,000,000 rate adjustment on rate base of $7,200,000,000 and 11.3% proposed return on equity and a 53.8% equity capitalization ratio. The case builds on our service reliability enhancements in the state with additional investments in a smart, modern energy grid and customer focused programs, while keeping rates comparable to other Pennsylvania utilities. Key components of the case include implementing a 10 year enhanced vegetation management program to reduce tree caused outages, reduce outage restoration time and reduce future maintenance costs recovery of costs associated with major storms, COVID-nineteen and LED streetlight conversions and changing pension and OPEB recovery to the delayed recognition method, which is based on traditional pension expense with amortization of previously recognized cumulative actuarial losses.

Speaker 3

The case also includes a blended federal state statutory tax rate of approximately 27%, but also continues to provide customer savings from previous changes to federal and state tax rates. Additionally, the application proposes a pension OPEB normalization mechanism to track and defer differences between actual and test year expense using the delayed recognition method. In addition to the base rate case, we plan to file a 3rd phase of our long term infrastructure improvement program this summer, which will include capital investment programs to improve reliability for the customers of Pennsylvania. And finally, turning to Ohio. Earlier this month, we filed a settlement for the 2nd phase of our distribution grid modernization plan, Grid Mod 2.

Speaker 3

The settlement includes a $421,000,000 4 year capital investment program to continue modernizing the distribution electric system by completing the deployment of 1,400,000 smart meters to our customers in Ohio. Finally next week, we plan to file a pre filing notice of our Ohio base rate case with a full application and supporting schedules by the end of May. Key highlights of the case will include a 2024 test year with over $4,300,000,000 in rate base and an equity capitalization ratio reflecting the actual capital structure of the companies. I plan to recover investments in riders DCR and AMI, which includes the grid mod capital investments and base rates and reset those riders to 0 and some of the same other features that we included in other rate case applications including pension recovery and pension tracking mechanisms. The current expectation is a proposal of a modest net increase to customers of less than $100,000,000 compared to current revenues and an overall average impact of less than 5% of total revenues across all customers, which will be refined over the coming month.

Speaker 3

And finally, just to touch on the balance sheet and the closing of the FET transaction. Obviously, a lot of hard work goes into any transaction like this, but this was a great team effort and we couldn't be more pleased with the results. Of the $3,500,000,000 in total proceeds, $2,300,000,000 was received at the end of March and was deployed immediately, consistent with our plan to pay off short term debt and to redeem long term debt totaling close to $1,400,000,000 of which $460,000,000 was at FE Corp. We expect to receive the remaining $1,200,000,000 later this year, which will be used to fund our capital programs and additional liability management depending on market conditions. This transaction completes a series of transactions over the last 2.5 years that resulted in over $3,000,000,000 in high cost debt redemptions at FE Corp, close to $2,000,000,000 in utility long term debt redemptions and $2,000,000,000 to pay off short term debt that would have otherwise been financed with long term debt at our utilities.

Speaker 3

And we are pleased to be back with an investment grade credit rating with all 3 rating agencies and understand and appreciate and respect the importance of this to all of our stakeholders. Thank you for your time today. We're off to a solid start this year with strong execution and a significantly stronger balance sheet to fuel our growth going forward. Now let's open the call to Q and A.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question is coming from Shar Pourreza from Guggenheim Partners. Your line is

Speaker 4

now live.

Speaker 5

Hey guys, good morning.

Speaker 2

Good morning, Shar.

Speaker 5

Good morning. Good morning. So Brian, I know obviously, John and Brian, thanks for the color on the Ohio case. I think you touched on some of the questions I had on that. But look, the state's likely going to become sort of this epicenter for hyperscalers.

Speaker 5

So I guess I'm curious if there's going to be any sort of kind of data center focused rate designer tariff filings in this case to maybe account kind of for these opportunities, especially you're trying to balance the impact to other customers while trying to track this business? And then maybe just as a follow-up there, Brian, how's the dialogue going with data centers in general? Thanks.

Speaker 2

So let me start with the second one. The dialogue with data center is really positive. We've been out to see Josh Snowhorn and his team out at Quantum Loop Hole right outside of Frederick, Maryland. It's amazing what they have going on there. It's kind of fascinating to see.

Speaker 2

We have 2, 230 kV lines that end in an open field where there used to be an aluminum smelter and now Josh and his team are building that huge data center complex. So we're in direct dialogue with them. They'll be one of our biggest customers over time and look forward to continuing that dialogue. We're also seeing as things like expand out from data center hubs from Northern Virginia, now you're seeing in the Panhandle of Maryland, the Quantum Loop Whole folks. We're seeing the same thing in Ohio.

Speaker 2

And as things expand out from Central Ohio, the place where I used to work, it's coming up into our service territory as well. And we're also seeing interest in Pennsylvania. Given what's happened with a number of power plant retirements over the years, our service territory has ample brownfield sites that are have land available and connectivity to the high voltage transmission system. So we think we're well positioned for some of that growth. We're continuing to invest as we go forward.

Speaker 2

The PJM Open Data Center 3 that we're able to fund about $800,000,000 to help enable that growth. We're excited about the opportunity going forward. John, I don't know, are we doing anything tariff wise to attract these or are we well set up given the tariffs that

Speaker 3

we have? Shar, that's a really good question. I think it's something that we will take a look at over time. Our tariffs are set up or such that some of these customers would be transmission related customers. So the revenue uplift to the distribution companies wouldn't be as significant as you would see maybe in a residential customer and that's by design.

Speaker 3

So, it is something that I think over time, we'll take a look at as well as I'm sure other utilities will take a at. But at this point in time, we don't have anything that we're planning for.

Speaker 5

Okay. That's perfect. And then Brian, lastly for me, and sorry, I got to ask this, but it's causing a little bit of angst this morning with investors. There's some new language in the queue kind of mentioning on potential fines coming from the OOCIC. I guess how do you book in the range of outcomes there?

Speaker 5

I know obviously the language is not going to be super material, but is there any kind of sort of read throughs or knock on effects on the ongoing PCO investigations or any other investigations there? Thanks.

Speaker 2

I don't think so, Sharon. Thanks for the question. There are 2 new things that we raised in that OOCIC disclosure. 1 was at the beginning of the disclosure we talked about we had traditionally talked about there being nothing that we were aware of that was outside of the DPA. Well, during the quarter, the OOCIC brought indictments against householder for things that had nothing to do with the DPA and we were unaware of that activity, which they found and obtained indictments on.

Speaker 2

And the other component is in regards to that investigation as well as the Attorney General has a civil suit against the company, we'd like to put both those past us and we may have to put a little bit of money on the table to do that. So we don't think it will be material, but we'd like to put a period on both those issues as it relates to the company and move on. I think some of you saw the language that the Attorney General used in the prior indictments when he complimented the company on its cooperation with his office and viewed us as a victim of the offenses that took place. So we think it's a constructive relationship and we just like to put a period on it and move on from there.

Speaker 5

Okay, great. Thank you guys so much. Appreciate it. And Brian, thanks for addressing that. Thanks guys.

Speaker 5

Have a good day.

Speaker 2

Thank you. Thanks, Shahriar.

Operator

Thank you. Next question today is coming from Michael Sullivan from Wolfe Research. Your line is now live.

Speaker 6

Hey, everyone. Good morning.

Speaker 2

Good morning, Michael.

Speaker 6

Hey, Brian. Maybe just I know you're about to file this year and appreciate all the kind of upfront detail on Ohio, but maybe if you could just give a little more on how you are able to keep the rate hike request so low in Ohio after being out for so long?

Speaker 2

Yes. So a lot of the activity that we're doing is taking things that have been handled in riders during that interim period and putting it in base rates. So things that customers were always paying for, but they weren't in base rates. So there's no customer increase associated with that. And then we're looking at refreshing the ROE, some cost structures and we anticipate that those things will be $100,000,000 or less in terms of gross increase and we expect the net impact on customer rates to be less than 5%.

Speaker 3

Yes, Michael, I'll expand just a little bit. If you think about rider DCR, that's been in place for over 10 years now and we've been able to earn on pretty much all of our investments in the distribution system over those 10 years. And to give you a sense of magnitude, that rider alone is close to $400,000,000 annually. And then if you look at the grid mod rider that probably got kicked off a few years ago with our grid mod 1 implementation, it's close to $100,000,000 So over the years, even though base rates haven't changed in over 10 plus years, we've been able to increase the returns on our investments through those riders and a lot of this case is just moving those riders into base rates.

Speaker 6

Okay. That's super helpful. Just a quick follow-up on that. With respect to the riders, does the outcome here in the next month in ESP 5 and how riders are treated there have any impact on how you approach the base rate case filing?

Speaker 3

No, I don't think so, Michael. I mean, this is capital that has been prudently spent. It's been on distribution reliability. I think it's been subject to audits in the past. So I think that is simply going to be moved from those riders into base rates.

Speaker 3

And if you look at the past in other jurisdictions, you really don't have an issue with moving capital that you've deployed in riders in the base rates. That's typically fairly straightforward in any type of rate proceeding.

Speaker 6

And last one for me, John, just the congrats on getting back to IG and just what are we thinking for timing and prospects for maybe even mid BBB? Sounds like you have the metrics to support it. Is it doable at both agencies and potential timing there?

Speaker 3

Yes. I'm not going to speak for the agencies, but S and P left us on positive outlook. And I think they're looking for the expiration of the deferred prosecution agreement, which will be in July of this year. I think we also need to build a track record of hitting our forecast and I think that's going to take some time to do that. And so that's what I think they're looking for and that's what our plan is.

Speaker 3

Great.

Speaker 6

Thanks very much.

Speaker 3

Thanks, Michael.

Operator

Thank you. Next question is coming from Jeremy Tonet from JPMorgan. Your line is now live.

Speaker 5

Hi, good morning.

Speaker 2

Good morning, Jeremy.

Speaker 7

Thanks for taking my questions. Just wanted to kind of touch base, I guess, on how things are progressing against strategic initiatives to kind of realign the organization, bring in new hires, decentralize decision making and assign KPIs further down the structure. How is that being received? How do you see, I guess, the culture changing? Just wondering any thoughts on how that's progressing?

Speaker 2

Thank you for that question, Jeremy. It's progressing really well. So we've added Toby Thomas as the Chief Operating Officer, Wade Smith as the Head of EFI Utilities and we just announced John Combs coming in. And these folks are hitting the ground running making an impact right away. If you look at how we're managing the company, we're managing it the way we're reporting it in segments now by those 5 major operating companies that we have.

Speaker 2

And things like energized 365 that is organized and planned according to those major business units. So the plans that summarize up to that 26 $1,000,000,000 spend over 5 years are all coming from those major business units and they have the plans to put that capital to work for the benefit of our customers by business unit. And so it's working the way we thought it would. It's we've transitioned from a CapEx that's kind of break, fix, repair in kind to one that gets our customers ahead in terms of reliability and gives us the opportunity to improve the customer experience rather than just treading water. And the transaction that both John and I talked about in our remarks enables that, right?

Speaker 2

You can't make the type of investments that we're talking about making without the strong balance sheet that we've had through the capital raises over time. So everything's coming together and working as it should. The money's come in the door, the balance sheet's strong and we have the plans by business unit to put the dollars to work. And you're seeing it from 2023 to 2024 and we have plans going out for 4 additional years as well to make this happen. So it's working the way it should, the way we envisioned it, and we're off and running.

Speaker 7

Got it. That's helpful. Good to see that there. And maybe following up on putting the dollars to work with regards to the energized 365 CapEx plan. Could you walk through the clean energy part a little bit more within the overall plan?

Speaker 7

And just wondering how that breaks down between solar, energy efficiency, EV infrastructure, energy storage, different initiatives and how you see the timeline for that unfolding and where could that go over time, I guess?

Speaker 2

So a lot of it, Jeremy, is on things that we're doing on the wire side to enable the energy transition. So you've seen 2 major pieces of that. 1 was the PJM Open Window 3, where we're able to put $800,000,000 to work. And the other is the New Jersey Offshore Wind Transmission component where we're putting over $700,000,000 to work. So significant components well over $1,000,000,000 in those initiatives.

Speaker 2

In addition to what we're doing with solar generation in the state of West Virginia on our way to rounding out a 50 megawatt commitment that we have there and would like to see 2 more of those 50 Megawatt commitments as we get further subscriptions. But a lot of it rather than being on the generation side is really on the wires component of the business and that's where the bulk of that 26 $1,000,000,000 spend is going to be.

Speaker 3

Yes, Jeremy, I just would add on a little bit. If you just look at the clean energy component of the $26,000,000,000 it's a little than 10% of the total portfolio. And like Brian said, a lot of that is in the state of West Virginia with the expected build out of additional solar as well as the energy efficiency investments that we need to make in New Jersey to hit the state required goals on consumption usage. So we're working through that program right now as we speak And we should have clarity I think later this year on the energy efficiency CapEx

Speaker 2

in New Jersey sometime later this year. One final piece that we've gotten questions on also Jeremy is that the DOE grip program and whether or not we've made applications for that. We proposed 5 projects and 4 of them we were asked by the DOE to proceed. And they include everything like distributed energy management, AMI, grid resilience, smart grid and storage. And so about $500,000,000 worth of projects we're moving forward within the GRIP program and hope to get some positive results on that later this summer.

Speaker 7

Got it. That's very helpful. And just one last one if I could regarding signal peak and recognize it's a shrinking part of the plan over time here. But I think there's just been some reports out there about BLM delays and how that impacts operations down the line there, whether it has to shut at a certain time. Just wondering any thoughts you could share with us there.

Speaker 3

No disruptions in the mine that we're aware of. In fact, we have in the plan about $0.12 of earnings contribution for the year. They contributed $0.03 in the Q1. So they're on track with their plan.

Speaker 7

Got it. That's helpful. I'll leave it there. Thanks.

Speaker 2

Thanks, Jeremy.

Operator

Thank you. Next question today is coming from Carlee Davenport from Goldman Sachs. Your line is now live.

Speaker 8

Hey, good morning. Thanks for taking the questions and for all the details so far. Maybe just on the pension volatility relative to what you've done so far, how could things like the proposals you've got in the Pennsylvania rate case around pension and OPEB recovery and the normalization mechanism impact the volatility levels that you see going forward?

Speaker 3

Well, if we're able to successfully get the pension tracking mechanism, that goes a long way in deferring the volatility onto the balance sheet because essentially you would be tracking to your test year expense and any changes from that point forward both positive or negative to that would be deferred on the balance sheet. So the volatility would be significant significantly reduced if you're able to achieve some of those pension tracking mechanisms. Now, we've applied for that in West Virginia, Maryland and New Jersey last year. We were unsuccessful there. We'll apply for those mechanisms in Pennsylvania and Ohio this year.

Speaker 3

But it is something that we'll continually go after even if we're not successful this year because I think it's important for us to make sure that we manage that volatility accordingly. I mean, the other thing we did last year is we did the pension lift out, where we looked at our former competitive business and lifted out about half of that liability at a favorable pricing, about a 95% of par, about a 5% discount, which also reduces the volatility in the pension plan by about 5%, 10%. And we plan to do another pension lift out at some point in time either later this year or towards the end

Speaker 2

of the year. So something that we're looking at right now. Carly, the beauty of that tracking mechanism is that the regulator is never wrong. Like there's always the true up. And so we're never making more or less than what we're asking for in rates.

Speaker 2

And it's always the right amount because it's based on the numbers. So we think it has a virtue that should be appealing to the regulators and others in our cases as well.

Speaker 8

Got it. Great. That's super helpful. Thank you. And then maybe just as you think about the balance sheet, are there any factors that we should be thinking about that could push the receipt of those remaining FET proceeds beyond the latter part of this year?

Speaker 3

So they've already filed for application with the last co investor and they've asked for accelerated approval. So I'm not anticipating any delay in that. So my expectation is that we should get the proceeds later this year.

Speaker 8

Great. Thank you so much.

Speaker 2

Thank you, Carly.

Operator

Thank you. Next question today is coming from David O'Cao from Morgan Stanley. Your line is now live.

Speaker 9

Hey, good morning. Thanks so much for taking my questions.

Speaker 10

Good morning, David.

Speaker 9

Maybe back on the Ohio rate case, I was wondering, are there any new mechanisms or new capital programs that we should watch for that might come with the following? It didn't sound like it, but anything new that you would plan to bring into this case?

Speaker 3

David, no. This will be a more traditional base rate case. I mean, obviously, we have the DCR in place, which really covers most of all of the capital in the Ohio Companies, specifically targeting distribution reliability enhancement. So, we'll have the grid mod program as well. So no new capital programs

Speaker 2

in this particular proceeding. Grid mod, which we do have a settlement in is a little over $400,000,000 and that will allow us to get on parity with our in state peers in that we're doing just the non controversial AMI implementation, which we hope to get. I just bought a house here in Akron. I've got a 40 year old analog meter on my house. It would be nice to be able to have that AMI technology in place and that's not controversial.

Speaker 2

The other component of Grid Mod 2 where we hope to be able to put more capital to work is in the distribution automation. And we've asked in that case to be able to demonstrate the benefits that customers got in Grid Mod 1 from the distribution automation and then come back at a later date and ask to be able to advance that program further.

Speaker 7

Got it. Got it.

Speaker 9

That makes sense. And then back on the topic of data centers, I was wondering how do you see the transmission opportunity growing over time in PJM? It sounds like you could be seeing greater load growth, whether it's in Ohio, in Pennsylvania. Just what's the transmission CapEx upside opportunity that you're seeing? Is that growing rapidly potentially as we see data centers move to that region?

Speaker 2

Yes. So it's a great question, David. I'll just say this, it's a little lumpy. So as these things are coming about, we're seeing things like the PJM Open Window 3, right? That was somewhat of an unanticipated opportunity that we don't have opportunities like that in our $26,000,000,000 plan.

Speaker 2

But as they come about, they'll be incremental to that plan. And so, we've seen that process play out last year. I anticipate that we'll see more processes through future open windows from PJM as they're looking to build capacity on the grid to enable the type of load growth that data centers represent. So you've seen it concentrated like I said before in that Northern Virginia, Central Ohio area and now it's branching out into other areas and we anticipate it we know it's moving into our service territories in Maryland, Pennsylvania and Ohio.

Speaker 9

Got it. Thanks. And I guess on that, just a quick follow-up. In your conversations with these data center customers, do you have a sense of the timing of when these are coming in and trying to connect to the grid when we could see a bigger increase in the load and interconnections coming?

Speaker 10

Yes. So

Speaker 2

I'd say it's in the years timeframe, but they're frequently getting more aggressive about wanting sooner service and that's all coming into things like their supply chain. Do they have the equipment necessary to put the equipment in, the cooling that they need, the generation that they need, all those things. And so we have time to see it coming, but I think they're getting increasingly aggressive about wanting service sooner and quicker than what they had previously.

Speaker 9

Yes. Okay. Excellent. I appreciate all the color. Thanks so much.

Speaker 2

Thank you, David.

Operator

Thank you. Next question today is coming from Greg Oro from UBS. Your line is now live.

Speaker 3

Yes. Hi. Thanks for taking the question. Just another follow-up regarding the DCR and how you see that getting rolled into getting recovery around that? Is it going to be sort of along the timeline of the new ESP 5 or will it be tied to the base rate case and how does that impact your

Speaker 4

guidance?

Speaker 2

Yes. So our anticipation is that the accounts that we're recovering in the DCR should be fully recovered in either ESP5 or the base rates. And there's been some discussion about that in the staffs filing in our responses. The accounts have been fully recovered for the last 12 or so years in the ESP 5 and they've been audited and deemed appropriate and approved on an annual basis. So whether they're all the accounts are in ESP 5 or in the base rate case, we're sort of indifferent to that.

Speaker 2

But fully believe that what's been approved and recovered and invested in for the last 12 years will continue to be in either one of those venues.

Speaker 3

Sounds good. Thank you.

Speaker 2

Thank you, Greg.

Operator

Thank you. Next question is coming from Anthony Crudell from Mizuho. Your line is now live.

Speaker 4

Hey, good morning. Just hopefully two quick ones. One on the deferred prosecution agreement, is there a date in June where it expires or is there will there be an announcement or there's an office issue with a notice out?

Speaker 3

Hey, Anthony, it's John. I think that's late July. It's not June. So it's late July. I think it's like the 20th or 22nd.

Speaker 2

And if we could make a filing prior to that, we'd like to be able to do that as well.

Speaker 4

Great. Can I repeat?

Speaker 2

Sorry, Anthony, just meaning not waiting till the absolute terminal date. If we've done everything we need to, to allow us to file sooner than that, we will.

Speaker 4

And if I take that with Shar's question earlier, you mentioned to clear that potential suit out suit up. Are those the last two items of deferred prosecution agreement and that potential lawsuit that Shah had brought up earlier?

Speaker 5

No.

Speaker 2

There's what we talked about earlier. There's the DPA. There's the securities case. And then there are the audit cases in front of the Ohio Commission, which we asked if they could proceed currently and hopefully get those behind us

Operator

as well.

Speaker 4

Great. And then just lastly, the move to investment grade, was there any existing debt that maybe was triggered to a higher interest rate because you were sub investment grade? And is there will that will those rates maybe trigger lower? And is there any significant interest savings going forward because

Speaker 3

of that? Yes. So not meaningful interest savings, but with the Moody's upgrade, we had an interest rate step up because we were sub investment grade. Now that's been eliminated effective with the upgrade, although it will start with the next interest payment later this year. I think on an annual basis that's less than $10,000,000 but nonetheless, I mean it's meaningful.

Speaker 3

And then I think we also got some better pricing on the revolving credit facility by about 25 basis points. So I mean, those all those things help. They may not be material in the grand scheme of things, but it is important to us.

Speaker 4

Thanks for taking my questions.

Speaker 2

Anthony, there's one more that I forgot to put on the list. There's the SEC investigation that we'd like to get settled as well.

Speaker 5

Great. Thank you. Thank you.

Operator

Thank you. Next question today is coming from Paul Patterson from Glenrock Associates. Your line is now live.

Speaker 10

Hey, good morning.

Speaker 2

Good morning, Paul.

Speaker 10

Just a follow-up, I think it might have been Jeremy's question on Single Peak. There's discussion about maybe being forced to shut down in 2025. Any thoughts there about how we should think about that? And if that happens, is it just a $0.12 maybe not being there? Or is there a potential for a negative EPS impact or something like that?

Speaker 3

Well, so Paul, thanks for the question. As we've kind of outlined in the plan, signal peak was $0.12 this year, but we really had them going to a very de minimis level of earnings contribution beginning in 'twenty five and beyond. So not significant to the plan in the grand scheme of things. And I don't think it would ever go to where we're incurring losses, but just kind of a breakeven proposition if it were to have to shut down.

Speaker 10

Okay, awesome. And then with respect to the grid mod settlement, is there any potential for having additional parties sign on to that? Or are we just going to go through what I guess has been outlined in the procedural Yale the hearing examiners. Are we pretty much just going to go down that road do you think?

Speaker 2

I think we're just going to go down that road Paul. It's June 25 is when I think we're expected to have the hearing on it. And we have a majority of the interveners signed on to the settlement. And there's like there's really nothing controversial about it. It's we're just trying to deploy the AMI that all the other in state peers are either at or close to 100% of, we're trying to round out and finish the remaining 2 thirds of our customers on.

Speaker 10

Okay, great. And then this has been a topic that's been coming up a lot in policy circles about trying to get more grid enhancing technologies to be deployed as opposed to the substantial build out and all the issues that are being seen with that in terms of cost and timing and stuff. I'm just wondering, how do you think about grid enhancing technologies? And do you have any thoughts about how they might be deployed at FirstEnergy or industry wide?

Speaker 2

Yes. So there are the our responses to the grip, I think, are grid enhancing technologies, grid resilience, smart grid storage, derms and the like. And so with the Department of Energy, we're looking to take that money that they're looking to help jump start some of those initiatives and get our fair share of those for investment for the benefit of our customers. That's about $500,000,000 of investment that we're looking to. And the Department of Energy is looking to put those dollars to work and make these pilots a reality and we're looking to take advantage of that for the benefit of our customers.

Speaker 2

So it's happening. The dollars are being put to work and we're trying to get our share of those dollars.

Speaker 10

Okay. But you don't expect any do you expect any widespread adoption of those in the near term or beyond just the pilots and the DOE funding and what have you? Is there any sense I know it's kind of a big question, so I apologize. But I guess, I mean, do you see any how do you see this as what the potential opportunity or threat might be associated with these technologies being deployed?

Speaker 2

I don't see it as being strategically disruptive for our industry. These new technologies, it's I think it's best to take a crawl, walk, run approach. And you've seen that in other places in the industry, Paul, not as big of a deal for us, but things like carbon capture and sequestration, right? To do it at a plant level, I don't think has been done on a commercial scale in this country with a coal fired power plant. So, you look at the new EPA rules, which would either call for that or retirement of the plants.

Speaker 2

I think you're if that rule were to go into effect, I think it would cause a lot of plants to retire because the economic technology just isn't there. Some of the things that we're proposing doing on a pilot basis, I think are best done on a pilot basis. But I don't see any of these technologies at this point strategically disrupting our industry.

Speaker 10

Okay, great. Thanks so much. Have a great weekend.

Speaker 2

Thanks, Paul. You too.

Operator

Thank you. Next question is coming from Angie Storozynski from Seaport Global. Your line is now live.

Speaker 11

Thank you. So, I'm just wondering. So all of these additions of data centers, especially those that are reliant on renewable power, assume that there's a well functioning grid with de minimis congestion issues. That doesn't seem right to me at least. And I was starting to hear from other PJM wires only utilities that they might be forced to building generation assets again and granted not maybe the next year or 2, but in the foreseeable future, I mean, I understand that that's a major change to a competitive power market, but those utilities think that that might be needed for reliability reasons.

Speaker 11

Is this something you see as well? Again, it seems like we're trying to manage 20 fourseven mode growth with intermittent resources. And I know transmission upgrades are in answer, but just wondering how you see it going forward?

Speaker 2

That's a really good question, Angie. We're having more and more discussions with regulators and other companies around the issue that you identify, which we're kind of calling resource adequacy. And certainly, it's something that people are talking more and more about it. You can't just have a robust wire system. You have to have a commodity to put on the wires.

Speaker 2

And so our 5 states have sort of different, stances relative to that. For us in New Jersey and Pennsylvania, we would require legislative changes. In Maryland, there's an in Ohio, there's an opportunity to for utilities to own generation on a very limited basis. And of course, West Virginia is a traditional integrated resource plan state. But for the region altogether, it is an increasingly talked about issue is will there be enough commodity to put on the wires in the face of the load growth that we're facing and the coal unit retirements that we're facing as well.

Speaker 2

So there's going to need to be a solution to it for us in 4 of our states where mostly wires. I don't think we'd ever be interested in owning generation in those states on a merchant basis. But if a state were to come to us and ask us to build on a regulated basis for a long term, I think that's something that we'd consider, but I don't think any of our states are near that point right now.

Speaker 11

And then changing topics on interest rates. So we're starting to hear from some of the utilities that they were counting on some tailwind from interest rates in the back half of the year. I mean, that might still happen. But just wondering, how do you see your growth plans and your financing plans, especially from an EPS perspective, if this current interest rate environment were to persist beyond this year?

Speaker 3

Yes, Angie. So in our plan for this year, the planned coupon rate for all new debt deals was 5.75%. And then we had it elevated through the planning period over the 5 years. And so it is something that we'll keep an eye on. If you look at the 2 bond deals that we've done this year, it's on a blended basis, it's right at 5.75%.

Speaker 3

So we feel good about that and I think we'll just have to keep an eye on interest rates.

Speaker 11

Good. Thank you.

Speaker 2

Thank you, Angie.

Operator

Thank you. We've reached the end of our question and answer session. And ladies and gentlemen, that does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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Earnings Conference Call
FirstEnergy Q1 2024
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