FirstEnergy Corp. (NYSE:FE) Q3 2020 Earnings Conference Call November 2, 2020 8:50 AM ET

Company Participants

Irene Prezelj – Vice President of Investor Relations

Christopher Pappas – Executive Director

Steven Strah – Acting Chief Executive Officer

Jon Taylor – Senior Vice President and Chief Financial Officer

Conference Call Participants

Shahriar Pourreza – Guggenheim Partners

Stephen Byrd – Morgan Stanley

Julien Dumolin-Smith – Bank of America Merrill Lynch

Angie Storozynski – Seaport Global Holdings LLC

Jeremy Tonet – JPMorgan

Steve Fleishman – Wolfe Research, LLC

Durgesh Chopra – Evercore ISI

Paul Patterson – Glenrock Associates LLC

Michael Lapides – Goldman Sachs

Paul Fremont – Mizuho Securities

Charles Fishman – Morningstar, Inc.

Disclaimer: *NEW* We are providing this transcript version in a raw, machine-assisted format and it is unaudited. Please reference the audio for any questions on the content. A standard transcript will be available later on the site per our normal procedure. Please enjoy this timely version in the interim.

Operator

[00:00:04] Greetings, welcome to FirstEnergy Corporation, third quarter Twenty twenty earnings conference call. At this time, all participants are going to listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance to the conference, please press star zero on a telephone keypad. As a reminder, this conference is being recorded. I was it is that. My pleasure to introduce your host. I represent Vice President of Investor Relations for FirstEnergy Corp.. Thank you, Mr. Irene Prezelj. You may begin.

Irene Prezelj

[00:00:38] Good morning, everyone, and welcome to our third quarter earnings call. Today, we will make various forward looking statements regarding revenues, earnings, performance strategies and prospects. These statements are based on current expectations and are subject to risk and uncertainties. Factors that could cause actual results to differ materially from those indicated by such statements can be found on the investor section of our website under the earnings information link and in our SEC filings. I would also call your attention to a new risk factor that is included in the 8-K we filed this morning. We will also discuss certain financial measures. Reconciliations between gap and non gap financial measures can be found on the first Energy Investor Relations website, along with the presentation, which supports today’s discussion. Participants in today’s call include our executive director Chris Pappas, acting Chief Executive Officer Steve Strah, and Senior Vice President and Chief Financial Officer John Taylor. We also have several other executives available to join us for the Q&A session. For those of you who do not know, Chris, he has been an independent member of the first energy board since 2011 and he retired in 2019 as President and Chief Executive Officer of Terenzio s a I’ll turn it over now to Chris.

Christopher Pappas

[00:02:15] Thank you, Irene, and good morning, everyone. I appreciate the opportunity to participate in today’s call. I’m going to start out by discussing the leadership transition the company announced last week. My role with the company and the board’s governance efforts. First, I will note that the DOJ investigation prompted a number of shareholder and customer lawsuits. And we are also responding to a subpoena we received from the S.E.C. on September 2nd related to the investigation into FirstEnergy by the SCC Division of enforcement. We are cooperating with the DOJ and the FCC. During the course of our internal review related to the ongoing government investigation regarding House Bill six, the Independent Review Committee of the board determines that three executives violated certain first energy policies and its code of conduct. When we determine that employee conduct is inconsistent with our policy and values, no matter how senior the individual. We have a duty to take action. And that is what we have done here. As a result, FirstEnergy announced on Thursday that CEO Chuck Jones, along with Dennis Chac, senior vice president of product development, marketing and branding, and Mike Dowling, senior vice president of external affairs, were all terminated effective immediately. Concurrently, Steve Straw, who many of you know from his roles as First Energy’s president and previously CFO, was appointed acting CEO. Steve has the experience, credibility and the support of the board in this role. Steve is a highly respected executive with deep knowledge of FirstEnergy business and significant operational experience. He became president in May 2020 as part of the company’s ordinary course succession planning process.

[00:04:29] In his various leadership roles at the company, including his recent tenure as CFO and president, has supported the execution of FirstEnergy long term customer focused growth strategy and demonstrated his commitment to delivering value to all stakeholders, including employees, customers, communities and shareholders. I look forward to working closely with him in my new role as executive director in this role, I remain an independent member of the board and will also work closely with Don. Misha’s are non-executive chairman. To assist management teams execution of strategic initiatives to engage with a company’s external stakeholders, including the investment community as appropriate, and to support the development of enhanced controls and governance policies and procedures, the board is already conducting a full review of governance and oversight processes to look for areas of improvement going forward. This is a serious matter for our board and for first energy management in order to address this in a timely and effective way. The board has formed a new subcommittee of our audit committee to quickly assess and implement potential changes as appropriate in the company’s compliance program. This effort will be led by independent board member Leslie Turner. Leslie retired as senior vice president. General counsel and corporate secretary of the Hershey Company, she joined our board in 2018 and is a member of the audit and compensation committees. This new subcommittee will work with management internal audit and also engage outside expertize for help and best practices. As I previously mentioned, we have and will continue to cooperate with the DOJ and SEC investigations.

[00:06:35] We have also reached out to companies, key stakeholders, including the ratings agencies, banks, regulators, legislators and union leadership.

[00:06:45] We believe the actions the board has taken represent an additional step towards addressing these matters and enables First Energy’s management to continue to focus on running the business day to day. FirstEnergy embarked on a strategy several years ago to become a fully regulated company and grow through the substantial opportunities available in both the distribution and transmission businesses. That strategy will continue. It is working and the foundational drivers are intact. The first energy organization at large has been delivering excellent results over the last few years, and that continues with the strong performance year to date and the company’s expectations for the full year as we look ahead. The board has full confidence in Steve. And the rest of the team’s ability to ensure a seamless transition and to continue to execute the company’s strategy, with that, I’ll now turn it over to Steve.

Steven Strah

[00:07:54] Thanks, Chris, and good morning, everyone. Well, I would have preferred to have assumed my new role under different circumstances. I agree with Chris that the actions taken by our board of directors last week were absolutely necessary and are an additional step towards addressing this matter. The management team is committed to working with the board to assess and implement potential changes as appropriate with the company’s compliance program. We take this as a serious and important matter and we will begin to address this immediately. In my 36 years with the company, we have faced challenges and changes and we have always emerge stronger and even more dedicated to our mission. Our management team remains focused on keeping each other safe, providing reliable service to our customers and executing our growth initiatives. I’m confident that we will continue to carry out this plan, finish the year strong and enter 2021 with momentum.

[00:09:07] I look forward to working with our team to achieve this. With that, let me transition to a brief update on our operations and recent regulatory activity. Then John will review our results and other financial matters. While the pandemic continues to impact our work protocols, our customers lives in the economy. I am extremely proud of the hard work and resiliency our employees have demonstrated throughout this crisis. We remain on pace to complete more than three billion dollars in customer focused investments across our system this year, and our business model and rate structure continue to provide stability. This morning, we reported third quarter operating earnings of 84 cents per share, a penny above the top end of our guidance range. Those results primarily reflect the successful implementation of our regulated growth strategies and favorable weather, together with a continuation of the pandemic driven lowed trends, we noted on our second quarter call, as John will discuss in more detail, the earnings impact of higher weather adjusted sales from residential customers more than offset the lower usage in our commercial and industrial sectors based on our strong performance year to date and the expectations for the next couple of months. We are affirming our guidance range of two dollars and 40 cents to two dollars and sixty cents per share and currently expect to be near the top end of that range.

[00:11:01] If decoupling is part of a House Bill six repeal, we would be closer to the two dollars and fifty cents per share midpoint. We have updated our funds from operations and free cash flow forecast for Twenty twenty to reflect the impacts of higher storm costs of approximately 145 million dollars and higher costs associated with the pandemic, including uncollectable bills of approximately 120 million dollars, most of which are deferred for future recovery. Although the events of this past week and the government investigations create additional uncertainty. We are affirming our expected Kaga of six percent to eight percent through 2021 and five percent to seven percent extending through 2023, along with our plan to issue up to 600 million dollars in equity annually in 2022 and 2023. With that said, we are mindful that the current situation may present additional challenges to meet this objective. John will address some tactics we are taking to address uncertainty created by the investigation. Now, let’s turn to regulatory matters in New Jersey, JCP now filed an RMI implementation plan with the Board of Public Utilities in late August. If approved, we would begin installing one point one five million smart meters and related infrastructure across our New Jersey service territory over a three year period beginning in 2023.

[00:12:57] Also, a.m. last week, we were very pleased that the BPU approved our settlement in the distribution base rate case, as well as the sale of Jacmel’s interest in the Yards Creek pumped storage hydro generation facility. The settlement provides recovery for increasing costs associated with providing safe and reliable electric service for our G.P.A. customers, along with the recovery of storm costs incurred over the past few years. It includes a 94 million dollar annual increase in distribution revenues based on an army of nine point six percent. The settlement also includes an agreement to delay the implementation of the rate increase until November 1st, 2021 to assist our customers during the pandemic. Prior to then, the rate increase will be offset through amortization of regulatory liabilities totaling approximately 86 million dollars beginning January 1st. The parties also agreed that the net gains from the sale of Jacmel’s interest in Yards Creek, estimated at 110 million dollars, will be used to reduce the regulatory asset for previously deferred storm cost. We expect to close the Yards Creek transaction within the next few months.

[00:14:35] Finally, to continue our commitment to customer focused transmission investments, we filed an application with Furch last week to move transmission assets in the Allegheny Power System zone to forward looking for Ameliorates. This includes transmission assets in the West Pend Power territory in Pennsylvania, the main power territory in West Virginia and the Potomac Edison territory in West Virginia, Maryland and Virginia.

[00:15:07] We are requesting an effective date of January 1st, 2021. In addition, we created a new standalone transmission company, Keystone Appalachian Transmission Company, or CatCo, to accommodate the new construction in this footprint. We filed last week to establish a forward looking formula transmission rate for CatCo, and over the next several months, we plan to make the necessary filings to transfer certain transmission assets from West Point Power and Potomac Edison to the new affiliate requesting an effective date of January 1st, TWENTY TWENTY to. In closing, while I find it disappointing that we have arrived at this point, I have great confidence not only in the management team, but in the full support of the board of directors. And together we’re committed to lead this company out of it.

[00:16:14] I’d like to reiterate that are regulated growth strategy is strong, it is working and it is moving forward. And I am committed to working with management and the board to address changes to our compliance program. Thank you for your time. And now I’ll turn it over to John Taylor for the Financial Review.

Jon Taylor

[00:16:37] Thanks, Steve, and good morning, everyone, as always, all Reconciliation’s and other detailed information about the quarter can be found in the strategic and financial highlights document on our Web site. While we traditionally follow the Tinku in connection with our call, we don’t expect to file it this week as we continue our review and closing procedures to ensure we provide appropriate disclosure. Also, as we noted in Friday’s 8-K, the violations of certain company policy and code of conduct by the terminated executives has caused us to reevaluate our controls framework, and that could lead to identifying one or more material weaknesses. However, based on our review of these issues, we do not expect any impact appropriate financial results. This morning we reported third quarter gap in operating earnings of 84 cents per share. As Steve noted, operating earnings were a penny above the top end of our earnings guidance range, largely reflecting the ongoing success of our regulated growth strategy, as well as benefits from whether. In the distribution business, revenues increased compared to the third quarter of 2019 as a result of higher weather adjusted residence or usage and incremental or revenue driven by our capital investment programs in Ohio and Pennsylvania. Total distribution deliveries decreased compared to the third quarter of 2019 on both an actual and weather adjusted basis.

READ ALSO  The Most Dangerous Appointment Joe Biden Has Made So Far

[00:18:04] Cooling degree days were approximately 21 percent above normal and relatively flat to the third quarter of 2019. Total residential sales increased five point three percent on a weather adjusted basis compared to the same period last year as many people continued to work from home and spend more time at home due to the pandemic in the commercial customer class. Sales decreased 5.5 percent on a weather adjusted basis compared to the third quarter of 2019. And in our industrial class, third quarter load decreased six point three percent compared to the same period last year, consistent with the trends we’ve seen for the past 12 months. The only sector showing growth in our footprint was shale gas. As we discussed last quarter, the increased residential volumes more than offset the decrease in commercial industrial load from a revenue perspective. In our transmission business, earnings were flat compared to the third quarter of 2019 as the earnings growth associated with our energizing the future transmission initiatives were offset by higher net financing costs and the absence of a tax benefit recognized in the third quarter of 2019. And in our corporate segment, our results primarily reflect higher tax benefits compared to the third quarter of 2019. In the fourth quarter, we will make our annual pension and op ed mark to market adjustment based on the asset returns through September 30th and the discount rate ranging from two point seven percent to three percent.

[00:19:34] We estimate that adjustment to be between an after tax loss of 330 million to a gain of 40 million. As a reminder, this is a non-cash item. Year to date, our return on assets is nine point two percent versus our assumption of seven point five percent and our fund status remains at 77 percent. As Chris mentioned, we proactively reached out to the three rating agencies last week to discuss with them the leadership transition and our path forward while we believe the fundamentals of our business remain strong. We understand there are certain management and governance factors that the agencies consider in their risk assessment, which ultimately impact the credit ratings. The rating agencies have taken numerous actions and we have provided all the details in the Investor Factbook. If court remains at investment grade with those Fitch and Moody’s and S&P, while we are not investment grade at Epicor or FirstEnergy transmission, all other subsidiaries remain investment grade at their issue level ratings. We will continue to maintain our open dialog with each of the agencies and remain in close contact with them as we chart our path forward.

[00:20:46] Finally, I’ll take a few minutes to review other financial considerations and tactical changes we are making to address the uncertainty created by the investigations. First, from a liquidity perspective, I’ll remind you that we continue to have access to three point five billion dollars of credit facilities committed through December 2022. These facilities are substantially undrawn, with only one hundred and fifty million dollars borrowed. And we remain in compliance with all covenants and can make the necessary representations and warranties to bar new funds. In addition, we expect our holding company debt to remain around 35 percent of total adjusted debt. And we have no plans to increase debt at the first energy holdco to further refine expectations for 2021. I want to make a few comments about the dividend and reaffirm our dividend policy. Two years ago at Etai, we announced a targeted payout ratio of 55 percent to 65 percent of our operating earnings. In alignment with that policy, our board raised the quarterly payout by two cents per share for dividends paid in 2019 and then by one cent per share for those paid in 2020. Given our current yield of approximately five percent, we expect to hold our quarterly dividend at 39 cents per share or a dollar 56 per share on an annualized basis for next year.

[00:22:10] This would represent a 59 percent payout ratio to our Kager midpoint for 2021. The board will continue to review the dividend on a quarterly basis. From a tactical perspective, our 2021 baseline is flat to 2020 levels and we will soon begin developing plans for reductions to operating expenses if necessary. With respect to our overall capital programs for 2021, our capex programs will be at the three billion dollar level and we will consider reductions if necessary. Equity continues to be a part of our overall financing plan. As Steve said, we are reaffirming our plan to issue up to 600 million dollars in equity annually in 2022 in 2023 and we will take the necessary actions financially to weather this uncertainty and put the company in the best position possible. We believe these steps are prudent to provide flexibility as we face uncertainty in the near term. Before we begin Q&A, I’ll turn it back to Chris for a few more comments.

Christopher Pappas

[00:23:17] As we move towards questions and answers this morning, I want to summarize a few points. The investigation in matters related to it are ongoing and therefore we will not answer any questions related to this other than to refer to our earlier prepared remarks. I know you have many questions. We are not going to provide more information at this time. The board and management view this as a serious and important matter, and our newly appointed subcommittee of the audit committee, led by Leslie Turner as well as management and internal audit, will address this immediately. First, energy strategy is working and delivering results as shown in our third quarter twenty twenty results and our outlook going forward. But matters related to the investigation will add uncertainties to the future financial results of the company. The tactical financial changes that John described earlier are prudent to provide flexibility as we face uncertainty in the near term. And now we’re open to questions and answers.

Question-and-Answer Session

Operator

[00:24:26] Thank you. I would like to ask a question, please. Press star one on your telephone keypad, a confirmation to indicate elements of the question here. You may start to if you would like to remove your questions on the queue and properties using speaker equipment, it may be necessary to pick up your handset before pressing the Sakis. Our first question is from Shahn Perez with Guggenheim Partners. Pleased to see.

Shahriar Pourreza

[00:24:55] Hey, good morning, guys.

Steven Strah

[00:24:57] Good morning, Sheriff.

Shahriar Pourreza

[00:24:59] Oh, it’s a couple of questions here first. Does the board intend on publicly releasing any of its findings while the federal investigations are going on? And has the DOJ giving you any sort of timeline on a potential resolution?

Christopher Pappas

[00:25:16] Hi, this is Chris Pappas. Hi. No to both. This is the short answer. The investigation is ongoing and we will not be providing updates during that period. And and we have no certainty on the timeline at this point from the DOJ.

Shahriar Pourreza

[00:25:38] And then maybe just focus on a balance sheet perspective, just touch on how you could expect to finance a potential fine or penalty. I know, you know, you have some equity cushion with your one point two billion and guidance for 22 and 23 and potentially higher corporate tax rates could help improve the cash flows. So what is sort of the balance sheet capacity look like if you run into a scenario where there could be a deferred prosecution agreement?

Jon Taylor

[00:26:05] Hey, sure, this is John. I think that’s why that’s why we’re taking the steps that we’re taking now to provide additional balance sheet flexibility. You know, when we cut back CapEx, when we think about operating expense reductions, you know, that doesn’t necessarily max out your balance sheet over the next two years to fund that growth. In fact, that improves your balance sheet. So that’s why we’re taking the steps that we’re taking to just kind of make sure that we address this uncertainty because we don’t know where we’re going to be in a year or so with the Department of Justice and whether or not there’s going to be fine or Filani. So we’re just slowing back on growth for the near term. We can take additional actions if necessary, and I think that will provide plenty of balance sheet flexibility.

Shahriar Pourreza

[00:26:54] Perfect. And then just lastly for me, do you guys have any sort of current expectations around the fate of HB six and doesn’t sound like it, but could that sort of maybe impact your ability to provide twenty one guidance? And are you getting any sort of indication that the CEO could maybe seek to reopen the current ISP, which runs through twenty four?

Steven Strah

[00:27:20] Sure. This is Steve. The way we’re doing that is, you know, the E.S.P and the distribution rate freeze that’s in effect right now will continue through May of Twenty twenty. For the way I look at it, if the CEO would approach the company for some other different reason to open it, we would follow the lead of the regulator that that’s really the way I would view it. As for House Bill six, we’re following along the progress and commentary movements around the potential repeal of it. But right now we’re just following along with the state legislature to see what they would like to do next. So, Eileen, anything to ask?

Jon Taylor

[00:28:08] Sure, this is John I, I would say that it depends on how if it’s a repeal and replace how they put in the decoupling mechanism if they put it in at all. So I think there’s a lot of unknowns.

[00:28:22] But if you remember going back to 2018 and then how we implemented decoupling this year, it wasn’t but about a four or five cent help to our earnings profile in the current year. So I think you’ve got to keep that in consideration when you think about these types of things.

Shahriar Pourreza

[00:28:41] And Steve, you know, I wish it was under better circumstances, but really good luck on your transition. I think you do. Great. So thanks, guys.

Steven Strah

[00:28:50] Sure. Thank you very much.

Operator

[00:28:54] Our next question is from Stephen Byrd with Morgan Stanley. Please proceed.

Stephen Byrd

[00:29:01] Hi, good morning.

Christopher Pappas

[00:29:03] Good morning, Steve.

Stephen Byrd

[00:29:05] And it’s just a process question has your internal committee been sharing all findings and documents with the DOJ and FCC as you’ve been kind of going through your process?

Christopher Pappas

[00:29:18] We’ve been cooperating with both agencies, Stephen, yes, the company has been operating with both agencies, right.

Stephen Byrd

[00:29:25] And Chris, are you confident that no other first energy officers or employees are in violation of EPS policies or the code of conduct?

Christopher Pappas

[00:29:35] The investigation, Stephen, is still ongoing and would be premature to make any comments on that until we get to a more conclusive state.

[00:29:46] Understood. Have you received any other subpoenas? I think you mentioned the SEPs SEC subpoena. Have you received any other subpoenas from any federal or state entities recently?

Christopher Pappas

[00:29:58] No.

Stephen Byrd

[00:30:00] Understood. And have you uncovered any other violations that extend beyond the purview of the FBI investigation, for example, involving other states or interactions with Tuko?

Christopher Pappas

[00:30:15] It’s really premature to comment against even the dismissals of the employees that suf that you heard about last week or related to violations of the company’s policies and code of conduct. And that’s really all we can say at this time.

Stephen Byrd

[00:30:31] You understand? I know it’s challenging for you to be able to to address some of these questions. And do you have a sense over what time frame you’ll be sort of coming to your internal conclusions in terms of your investigation or or is the timing unclear?

Christopher Pappas

[00:30:48] I think the timeline is unclear. What we can say is that the subcommittee that we formed under the leadership of Leslie Turner will begin their work immediately on working on our own internal policies and compliance, and we’d expect some readout from them as the company reports its first quarter earnings. Now, that’s not around the investigation, to be clear. That’s around working on improving our policies, around compliance. That’s a parallel process. Of course, the investigation.

Stephen Byrd

[00:31:22] Understood. Last one for me, just on the cue, John, you mentioned potential for material weaknesses. Are there any particular sort of financial implications, financing implications or other implications if you do end up concluding that there are material weaknesses?

Jon Taylor

[00:31:40] I wouldn’t I wouldn’t think so, like I said, based on everything that we’ve looked at, you know, even if we conclude there is a material weakness, there wasn’t any issue with the previous financial results that we’ve reported to our investor community. So, no, I wouldn’t expect any issues like that.

Stephen Byrd

[00:32:00] Understood. I’ll let others ask questions. Thank you.

Operator

[00:32:06] Our next question is from Julian Tomalin Smith with Bank of America. Please proceed.

Julien Dumolin-Smith

[00:32:15] Hey, good morning, Kim, thanks for the time. I hope you all hang in there. I wanted to pick it up on the earnings side of the equation here. If you can, can you more specifically the puts and takes here in terms of the bouncy lattitude as well as the earnings trajectory outlook? Just so if I hear you right, for instance, sounds like there’s some cost levers. One, too. It sounds like the decoupling piece could be about a dime from 250 to 60, give or take. And then third, I’m curious if there’s anything else in terms of potential impacts, if you can address it from a credit rating change on future financing assumptions baked into the plan as well. If there’s anything else.

READ ALSO  17 Education & Technology Group Files For U.S. IPO (Pending:YQ)

Christopher Pappas

[00:32:59] Juliets, that’s a lot there. Let me let me see if I can kind of address it. You know, we’re taking these steps to preserve balance sheet flexibility. That that’s I mean, we’re we’re in an uncertain period of time. You know, this thing has to play out over a period of months, you know, maybe into next year. And we think it’s just prudent to take these steps to cut back on some capex, to maybe look at some operating expense reductions so we can have some flexibility if something bad goes our way. I would say the decoupling mechanism is only about four or five cents, not the 10 cents that you mentioned. So I think in the grand scheme of things, that would be something that we would overcome in a year.

Steven Strah

[00:33:47] You know, Julian, this is Steve. I would just add in my prepared comments. You know, we talked about reaffirming our our business plan. And it’s very strong and it’s very robust. You know, in terms of confirming Arcega for EPS through 2023, our plan remains unchanged at this point.

[00:34:11] I think what you’re also seeing with our most recent quarter results, you’re seeing the resiliency of that business plan that we’ve talked about before. So I think that speaks very strongly for our company and for the potential next few. Well, the potential next year to achieve some level of uncertainty here. We’re not only sticking with that base business plan, but as we announced today, we are moving the Allegheny assets into formulaic rates from a transmission standpoint. And at that point, once that’s concluded, you know, you’re going to see our transmission system 100 percent on formulaic rates moving ahead. So once again, it takes the strength that we have in our transmission program and it even deepens it more. So that’s the perspective that I would bring to it.

Jon Taylor

[00:35:09] And Julianne, this is John. I think you had a question on just financing costs. You know, as you think about the ratings that we have today, we are still investment grade with all the rating agencies except for S&P. And that said, FirstEnergy holdco and then first energy transmission. The majority of our financings over the next few years are going to be at our subsidiaries, which have investment grade credit rating. So I don’t see that being too much of a challenge. We do have some holding company debt that comes due in 22 and 23, but we’ll be able to manage through that.

Julien Dumolin-Smith

[00:35:45] Got it. That’s what I was thinking, I was trying to reconcile those moving pieces here, if I can clarify even further, when you think about the preserving balance sheet flexibility, we expect update here in the next couple of quarters as far as explicit targets and what that means from an earnings perspective going forward. Obviously, this is, you know, somewhat fluid, but curious on how you would prepare to delineate it.

Christopher Pappas

[00:36:10] Right. I think we’ll have more next early next year when we talk about the fourth quarter results.

Julien Dumolin-Smith

[00:36:17] Got it. All right, excellent. Well, best of luck. Thank you very much.

Christopher Pappas

[00:36:22] Thanks, Joanne.

Operator

[00:36:25] Our next question is from Angie Starzynski would see for a global please proceed.

Angie Storozynski

[00:36:33] Thank you so I mean, I know we’re trying to look forward, but I’m still processing the information that we were provided during the second quarter earnings call. And I know that Chuck is no longer with with the company. But I mean, can you help us if you reconcile those little statements with, you know, the attempts to rebuild credibility among investors and leave it open ended like that?

Christopher Pappas

[00:37:06] Well, Angie, it’s Chris, I think the only thing we can say is the internal investigation by the board and outside counsel has led to the outcomes that you saw Friday. And that’s really the only kind of comment we can make about about that past and that the dismissals of the executives mentioned were for violations of company policy and code of conduct.

Angie Storozynski

[00:37:38] Ok, and then could you share with us you have talked to your state regulators and what kind of feedback you have received following this this this news about management changes?

Steven Strah

[00:37:52] Angie, it’s Steve. We did do a comprehensive outreach not only to the state legislators, the regulators, state and local officials throughout our footprint. So I think if I was to characterize the outreach and the feedback, they were appreciative of our very prompt effort to to talk to them and communicate the news. They were obviously various levels of surprise and shock, if you will, of the actions that the board took in a very decisive manner. But they understood once we talked them through that in general, just like we are today. And there were concerns expressed. Right. It was a significant change. It happened very quickly. And really, this is where we really have to lean on the relationships we have with the regulatory bodies. We’ve worked very, very hard over decades. In recent decades, I’ve been with the company to ensure that we have great two way communication and give and take on various issues. And, you know, this is where you rely on those relationships. As acting CEO, I’m going to really make it a large part of my role to ensure that we can continue to communicate very closely with them, listen to concerns, respond appropriately and and move ahead. It’s like any other relationship in life. It’s it’s a two way communication. And I need to instill and promote that level of trust in FirstEnergy. And and I’m prepared to do that.

Angie Storozynski

[00:39:40] Thank you and your first question, given how the stock is trading and given that you have equity needs even even without this investigation or any potential penalties that might come out from that, would you consider asset sales or something else in lieu of straight up equity?

Jon Taylor

[00:40:03] Angie, this is John, I think we’re taking these actions, you know, internally with CapEx reductions, OpEx reductions to give us flexibility, including issuing equity.

[00:40:16] So I think those are the things that we’re focused on first and then we’ll see where we are sometime down the road.

Angie Storozynski

[00:40:26] Thank you.

Operator

[00:40:30] Our next question is from Jeremy Toney with JPMorgan. Please proceed.

Jeremy Tonet

[00:40:36] Hi, good morning.

Steven Strah

[00:40:38] Good morning, Jeremy.

Jeremy Tonet

[00:40:39] I just want to follow up a bit on some of the earlier conversation with Ohio and if Ohio repeals or replaces House Bill six legislation, he walk us through the exact impacts, their guide to the Top End with no changes but to the midpoint of the couple is repealed. Sounds like half the drag is retroactive. Full year decoupling, removal. But what were the other kind of moving pieces there? If you can explain if you could clarify a bit there, that’ll be great.

Christopher Pappas

[00:41:09] So I think you would go back. The assumption would be we would go back to the rate construct that we had in 2018. So you would remove the decoupling mechanism, but then you would reestablish your energy efficiency rider under the rider DC. So that would be the construct. So it would be about a five percent discerns.

[00:41:32] And then you are no longer going forward, depending on how they repealed and replaced, if decoupling was no longer part of the rate structure going forward, then you would have those that mechanism that or DC in place going forward.

Jeremy Tonet

[00:41:48] Got it. So I think you said Bison’s, they’re just trying to figure out, I think you pointed to the top end of the guy, you know, with HB six and the midpoint without being kind of a 10 cent delta there. So just wondering what the remainder of that delta is. I guess that drives the high end versus the midpoint.

Christopher Pappas

[00:42:06] Well, maybe I’ll say it this way, you know, right now we think we’re going to be near the top end if we hit the five cents or the House bill six is repealed with the decoupling will be around the midpoint.

Jeremy Tonet

[00:42:19] Got it. OK, and then just one last one, if I could appreciate this, a bit of an awkward question, but just wondering, Chris. Well, Stephen is now the acting CEO. What are the next steps forward here on the CEO process?

Christopher Pappas

[00:42:37] I think it’s a great question, Jeremy, happy to answer.

[00:42:41] Steve has been clearly the candidate in our board normal succession planning process for the CEO of the company that’s evidenced by his movement through the company, including his prior role as president. Do the circumstances of what we experienced? Last week, the board decided to move Steve immediately into the acting CEO role. And we would envision continuing on our succession plan, which is to at the right time in the near future, have him assume the role of CEO. So in my view and the board’s view are on a normal transition to CEO with the person we always had in mind.

Jeremy Tonet

[00:43:28] That’s a very helpful context, thank you.

Operator

[00:43:36] Our next question is from Steve Fleishman with Wolfe Research. Please proceed.

Steve Fleishman

[00:43:44] Hi, good morning. I just wanted to make sure I clarify the tactical changes relative to your. One tactical changes, you kept the dividend flat and then I guess the other tactical changes are. Potential cost cuts and capex cuts, if those latter ones are made, would that change your plan meaningfully or is it still kind of within the construct of. Of the the the plan has reaffirmed.

Jon Taylor

[00:44:20] Steve, this is John, we would do that all in the construct of the plan we’ve been talking about.

Steve Fleishman

[00:44:28] Ok, that’s helpful. And the. I know you mentioned there’s no doubt that if your credit ratings at the fee parent. Of course, both S&P and Moody’s downgraded below investment grade. There’s no need for any triggers or any other related impacts.

Christopher Pappas

[00:44:54] No.

Steve Fleishman

[00:44:56] OK. And then on on the credit line and facility, if you have these material weaknesses in your cue, that doesn’t that doesn’t affect those facilities at all.

Christopher Pappas

[00:45:11] Let me let me let Steve sort of take a look.

Steven Strah

[00:45:16] Hey, this is Steve Staab. I’m the treasurer of the company. So in the event that there would be any violations of any covenants under our credit facility, we would then at that point in time, have to go and request a waiver from our bank group.

Steve Fleishman

[00:45:31] Ok.

Irene Prezelj

[00:45:35] Steve, this is Irene, I believe you said that Moody’s downgraded us, Moody’s affirmed our rating.

Steve Fleishman

[00:45:42] I guess I supposed. Yeah, I’m aware of that old agency said in the end zone.

Christopher Pappas

[00:45:50] So so if both rating agencies downgraded us again, which means S&P ratings would go from double B plus down to double B, and all of our utilities at that point would go down to non investment grade. And then the Moody’s credit rating would go from Vasari to be a one hour financing costs would obviously be a little more expensive. The holdco step up provisions that we have with our bonds at the holding company, which applies to about four billion of them, would obviously become a little more expensive because they would increase by about 50 basis points in terms of cost. Our credit facilities would become a little more expensive. That would increase strong pricing by 25 basis points, and we would have to post potentially up to about 40 million of collateral.

[00:46:36] It’s all manageable and I think that’s very yeah.

[00:46:42] I do want to say that, you know, we have experience, you know, at the double B plus credit rating right now with respect to S&P. S&P had us at that rating from 2010 through most of 2018. And so, you know, we are experienced at that current credit rating right now. And I wouldn’t expect any issues accessing the capital markets if the ratings were lower. Simply, it would just be more it would just be a little more expensive for us.

Steve Fleishman

[00:47:16] Great. That’s very helpful. But it’s not like the liquidity type events is just a little bit higher financing costs.

Christopher Pappas

[00:47:23] That is correct. I mean, we’re a fully regulated company now. So, you know, FX is no longer a part of FirstEnergy. And, you know, back then when it was a part of US, collateral requirements would have been much higher.

Steve Fleishman

[00:47:37] Great, I’ll leave it at that. Thank you. Appreciate it.

Operator

[00:47:45] Our next question is from. They’re for with Evercore ISI. Please proceed.

Durgesh Chopra

[00:47:55] Hey, good morning, team, thanks for taking my question. I have one clarification and then one quick follow up just on the internal investigation. Is that now over? I appreciate there’s a subcommittee to look at sort of governance practices and improve them, perhaps. But just is the internal investigation now over at this point?

Christopher Pappas

[00:48:14] No, it is still ongoing, as are the other investigations.

Durgesh Chopra

[00:48:21] Thanks for that clarification and then just maybe one for for John. John, we’ve had a ton of discussion with investors around regulatory arly, which is Gappah specifically in Ohio. Maybe just could you help us? You know where you are with that? The difference is what drives the differences there and where is regulatory versus gap? Are we perhaps at the end of Q3 or maybe even early in the year?

Jon Taylor

[00:48:50] Well, you know, there’s obviously several differences between how we report our financial results for for Gap and how we report them from from a regulatory perspective, for instance, from a regulatory perspective in Ohio, you excluded the deema when when that was in place. There’s other things that from a regulatory perspective that you exclude. For instance, in Ohio, you only get pension service costs and as part of your race. So the non service piece is excluded from the regulatory, which is typically a credit for us.

READ ALSO  Rabobank: Yesterday One US 'Journalist' Tweeted About Joe Biden's Socks

[00:49:28] So there are items like that that, you know, really drive the difference between what we report on a gap basis versus what we report on a regulatory basis.

Durgesh Chopra

[00:49:40] And then maybe can you comment and perhaps this is a follow up with our but can you comment where you are in terms of their regulatory authority in Ohio?

Christopher Pappas

[00:49:50] Well, we filed the Ohio seat. For 2019 and we were ten point nine percent, ten point eight percent somewhere around there.

[00:50:03] So, you know, that’s kind of where where we are.

Durgesh Chopra

[00:50:07] Ok, great. Thanks, guys, much appreciate the time.

Operator

[00:50:14] Our next question is from Paul Patterson with Glenrock Associates, please proceed.

Paul Patterson

[00:50:21] Hey, good morning.

Christopher Pappas

[00:50:22] Good morning, Paul.

Paul Patterson

[00:50:25] Just to sort of clarify here, it sounds like we may not get any you guys aren’t really planning on disclosing anything until after the DOJ investigation is complete in public. Is that the way to think about this?

Christopher Pappas

[00:50:40] Yes.

Christopher Pappas

[00:50:43] OK. And then with respect to Keiko. Could you remind us I think that’s going to begin in 2022. That’s what you guys have planned. Could you remind us what the what the earnings impact would be that.

Christopher Pappas

[00:50:59] Well, I think I think we’re going to file for rates affected one one 21 and then we would move those assets into that transmission company, one one 22.

[00:51:10] If you look at the rate base, it’s 750 million dollars somewhere around there.

[00:51:15] So, you know, you would at first, I don’t think it’s going to be as meaningful just because you’re on a stated rate today and you’re going to transition to a formula rate. But it is an area where investment is needed. It’s an opportunity to improve, you know, the customer reliability in those service territories. And I think you’ll start to see some CapEx going in there and then it could be meaningful in China attacking the vice president, race and regulatory affairs.

Irene Prezelj

[00:51:42] I would just add that once those forward looking for their rates go into effect in Twenty twenty, one would expect the revenue to really just about one percent higher than it would have been in the savings rate in that initial year.

Christopher Pappas

[00:51:57] In just to place it in the broader context right now with that really represents perhaps 10 percent of our transmission footprint.

[00:52:08] So it’s not going to be large or significant, but once again, it completes the strategy that we have for transmission, and that is to move off the stated rates in the Allegheny footprint and go to formula. And as we proceeded, JCP will be successful there. We’re confident and this will be the last progression.

Irene Prezelj

[00:52:32] And interestingly, interestingly, this is the last sort of large in PJM that is not a formulary. Very good point in saying it. Right. So part of the transition.

Paul Patterson

[00:52:45] Ok, but just apologize for being a little off on this, but I think you guys are asking for eleven point three, five percent or a week and you guys plan on on getting that there. Are we being effective for 750 million dollars worth of assets beginning in 2021? And I understand that correctly, and I’m just wondering what the what the are we. I know it’s different jurisdictions and stuff, but it’s just what’s the are we in general that you guys have in those jurisdictions right now, roughly speaking?

Irene Prezelj

[00:53:22] It’s I mean, and again, the aurally was part of a black box settlement that was established for the state of race many years ago. So there is no stated Arawa, what we did file for before. We’re looking forward to the race to the Fazioli of ten point eighty five and then the 50 basis point atter for RTR participation, bringing that are we up to eleven point three, five percent and filed.

Paul Patterson

[00:53:51] Ok, we’ll go forward afterwards. Thank you so much.

Christopher Pappas

[00:53:57] Thank you.

Operator

[00:53:58] Howard. Our next question is from Michael Lepidus with Goldman Sachs. Please proceed.

Michael Lapides

[00:54:04] Hey, guys, thank you for taking my question. First one is probably for John, which is I’m trying to think about the accounting of the GPL rate case. Can you walk us through the earnings impact of the rate increase versus the cash flow impact? I understand they’re probably different, given that the amortization of the regular Regg liability is just the rate increase, not really impact earnings next year because they’re not really impact cash flow next year or does it not impact both?

Jon Taylor

[00:54:36] It does not impact cash flow next year, but it will impact earnings next year because you’ll implement the base rate increase beginning January of 2001, but that will be offset by amortization of a regulatory liability so customers will not see the increase. But first, energy will receive the earnings at China.

Irene Prezelj

[00:54:56] And I would just add to that that we will pick up too much November and December of Twenty twenty one for base rate increase. So a little cash there. And the company as a condition of this settlement is able to retain the Yards Creek game, which is an influx of approximately, as you said earlier, 110 million dollars expected in 2021.

Michael Lapides

[00:55:18] Got it, and if I think about it, the the revenue increase, just over 90 million dollars or their costs that go up with it, that will be offset on the income statement or what, that 94 million drop to the bottom line?

Christopher Pappas

[00:55:33] Yeah, if you remember, part of our request was to collect deferred storm costs. They adjusted, you know, storm costs that are included in the base rate. So there are costs associated with that rate increase.

Michael Lapides

[00:55:48] Can you just give us an inkling of how much of that does drop to the bottom line?

Christopher Pappas

[00:55:53] I think it’s four to five cents a share.

Michael Lapides

[00:55:57] Meaning that’s the benefit from the ninety four million rate increase.

Christopher Pappas

[00:56:00] That’s correct.

Michael Lapides

[00:56:02] Got it. Thank you, John. Much appreciated. Last, any trivia question? Any thoughts at all about generation transformation, meaning transforming the fleet in West Virginia going forward? Just curious, given that’s the one place you own generation and it’s obviously a coal heavy fleet in West Virginia. Just curious, given the declining costs of gas fired generation, as well as obviously solar and wind, how you’re thinking about what your fleet looks like three to five years from now, that.

Christopher Pappas

[00:56:34] Well, right now, we’re working towards publishing that publishing, but submitting our IRP for West Virginia, so within that document, we’re going to articulate some of our moving forward thoughts for West Virginia. You are right. It it is a coal fleet there for us. And we’re very cognizant of our responsibilities to run those plants. However, as you look forward, you know, there is an opportunity, for example, to be able to install solar within the state right now. And we’re also considering that. So more on that later. We’re due to submit that filing in December of this year, correct? Every.

Michael Lapides

[00:57:25] Got it. Thank you, guys, much appreciated. Thanks for taking my questions.

Operator

[00:57:34] Our next question is from Paul Fremont with Mitsuo Securities, please proceed.

Paul Fremont

[00:57:42] Thanks. I guess the first question I have, just to get a better understanding of the five to seven percent growth through Twenty twenty three, which I thought had been in part at least linked to your rate base growth. In terms of if you end up cutting back on CapEx and you have lost repace, would you be making that up then through own reduction, or can you just explain how you would be able to to maintain the five to seven?

Christopher Pappas

[00:58:13] I think there’s a lot of different moving pieces. Cost containment would obviously be one.

[00:58:19] Things that we could do, and we already have seen some some favorable impacts in our forecast from the favorable returns we had last year in our pension. So that’s going to flow through. If you think about where interest rates are today versus where we where they were when we confirmed Arcega last year, borrowing costs are down. We had a very successful bond deal at Effy Corp. earlier this year. So they’re all factors that are driving our confidence in that number.

[00:58:51] Now, there is some uncertainty that we have to deal with, and that’s why we’re taking these steps to kind of provide for some flexibility if if something, you know, goes doesn’t go our way.

[00:59:02] But but, you know, just because we’re cutting back CapEx, 250 million dollars is not going to throw us off track to get those results.

Steven Strah

[00:59:10] And just as a reminder that 250 million dollars roughly on a budget within our plan that we were counting on to be three billion to three point twenty five billion. So once again, it’s it’s prudent to do the planning right now.

[00:59:29] And and it’s a small portion of a much larger pie that helps fuel our transmission, earnings power. And by the way, just to emphasize it, you know, as we’ve said before, very important for customers to we’re seeing significant reliability improvements within those investments. So it’s it’s Duell, right? Customers are seeing benefit and it is a very good earnings engine for the company appropriately.

Paul Fremont

[01:00:05] And the next question would be on the second quarter call, you would indicated that you would not seek to alter a potential rating agency downgrade to some investment grade because you expected to be vindicated as part of the investigation. Are you now comfortable to remain some investment grade with at least one rating agency?

Christopher Pappas

[01:00:32] No, no, we’re not comfortable with that. I mean, but at the end of the day, it’s related to governance issues and I think that’s why we’re taking the steps that we’re doing to address the governance matters, the compliance matters with Leslie’s subcommittee, and that’ll be part of what they focus on.

Paul Fremont

[01:00:54] So expectation would then be once you put additional governance measures into place, the rating agency would then reverse the downgrade action.

Christopher Pappas

[01:01:05] I mean, we would have to talk to them about the steps that we’re taking, the findings we we found the recommendations. I think it’s going to take some time for us to work through this. But our focus is going to be improving on those types of matters so we can get the rating back to invest in. Great.

Paul Fremont

[01:01:28] So you would not take action to issue equity to try and bring the rating back up?

Christopher Pappas

[01:01:33] No, no. Great. OK, thanks both.

Operator

[01:01:43] Our next question is from Charles Fishman with Morningstar. Please proceed.

Charles Fishman

[01:01:49] Thank you. On with CatCo. As I recall with with happening in May as part of the energizing the future, there was this incredible opportunity for investment because of the investment, really with the things going on at the U.S. military and everything else, not 10 years ago, is there that same opportunity at Taxco once we get beyond 20, 23, and assuming the forward we’re making goes into effect, would you envision the investment accelerating as that transition coach?

Christopher Pappas

[01:02:28] I think there is significant opportunity in CatCo and that’s exactly why we made our filing. I think it also provides additional flexibility for our company to move. Let’s just say that three billion dollar transmission’s spend around our system.

[01:02:46] So once again, while under a stated rate, we believed our strategy would be better suited to go after investments in other formulaic rates around our system, when you look at the reliability of the transmission system in general, we found greater needs at ABC and made rather than pursuing anything in Allegheny in the early going of the Energizing the Future program. You know, it’s very difficult to believe, but we’re entering, I believe, year seven of that program. So we’ve seen reliability improvements in both of the other transmission companies. We are certainly not done yet. I believe we have a pipeline of 20 years worth of work that, you know, we’ve fixed a 20 billion dollar number two in terms of potential additional transmission upgrades. So to your earlier point, there’s what I would call a pent up need there and we’re responsibly addressing it.

Charles Fishman

[01:03:54] That’s helpful. Thank you. That’s all I have. Thank you.

Christopher Pappas

[01:03:59] Ok, well, thank you very much. Yes.

Operator

[01:04:05] Please proceed.

Christopher Pappas

[01:04:06] Ok, thank you very much. I just wanted to close out the call by thanking you for your time and attention today and the interest in our company. And I know that we did our very best today to provide you a fulsome update on recent key events. We also look forward to talking and meeting with each of you in the virtual EEI conference coming up. So look forward to that very much. I would also just close with a message of safety, you know, the pandemic that is still very much alive in this country. As a company, we’re working very hard to keep our employees safe and our customers safe. I just wish all the best to each one of you is as we maintain the right safety protocols while we’re we’re working through it. So all the best to you and be safe. Thank you.

[01:05:06] Thank you. This does conclude today’s conference, you may disconnect your lines at this time and have a wonderful day.



Via SeekingAlpha.com