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spk06: Greetings and welcome to the First Energy Corp Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your hosts, Irene Prezel, Vice President, Investor Relations and Communications,
spk05: for First Energy Corp.
spk01: Thank you. Good morning, everyone, and welcome to First Energy's fourth quarter 2023 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. and we plan to file our Form 10-K next week. Today's discussion will include the use of non-GAAP financial measures and forward-looking statements. Factors that could cause our results to differ materially from these 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.
spk11: Thank you, Irene. Good morning, everyone. Thank you for joining us today and for your interest in First Energy. It's hard for me to believe that I've been with the company for eight months already. Time has flown by as I've gotten to know the fantastic employees of this company who are dedicated to serving our customers every day. Some of you have heard me say previously that I consider myself to be a good teller of great stories. Well, our employees have given me a great story to tell for 2023, and I'll do my best to tell it well. This morning, I'll provide an overview of our financial performance for the fourth quarter and full year of 2023. I'll discuss some regulatory milestones that we recently achieved. We are also unveiling today an exciting capital investment program focused almost entirely on our WIRES business. Over the next five years, we plan to invest $26 billion in our regulated system to improve reliability in the customer experience. This represents an increase of more than 44% compared to our last five-year plan. We will maintain our vigilance on affordability as our current rates are below our in-state peers. John will provide more detail on this later. For the fourth quarter of 2023, First Energy delivered gap earnings from continuing operations of 30 cents per share compared to a loss of 71 cents per share in the fourth quarter of 2022. Operating earnings for the quarter were 62 cents per share, which was above the midpoint of our quarterly guidance range and compared to 50 cents per share in the fourth quarter of 2022. For the year 2023, the company delivered GAAP earnings from continuing operations of $1.96 per share and operating earnings of $2.56 per share, two cents above the midpoint of our guidance range. Employees worked diligently throughout the year to overcome significant headwinds. The impact of market conditions on our pension plan created an earnings drag of 30 cents per share, and unusually mild weather impacted earnings by 28 cents per share. Through our continuous improvement program, employees were able to drive base O&M down over $200 million, or 14% versus 2022. Half of those savings are sustainable, and this tremendous effort buoyed our full-year results by $0.32 per share, allowing us to meet our operating earning targets. In 2023, the company put $3.7 billion of CapEx to work to improve reliability in the customer experience. This was 16% more than was invested in 2022 and 9% more than budgets. 93% of the 2023 CapEx was invested directly into our WIRES businesses. Our projects and construction organizations were able to take advantage of the improving supply chain environment and the mild weather to put the incremental dollars to work. 2023 was a game-changing year for the company in terms of strengthening its balance sheet to enable future investment and growth in our mostly WIRES regulated business. In February of 2023, the company announced a second transaction with Brookfield to sell 30% of FVT for $3.5 billion. With the successful completion of our Pennsylvania consolidation and the anticipated order approving the filed settlement of the transaction, we are on track to close on this asset sale by the end of March. At that time, we will receive the majority of the proceeds in cash with the balance to be paid before the end of the year. In May, we successfully executed a $1.5 billion convertible debt issuance at a 4% coupon. We used these proceeds to pay down debt and make a $750 million contribution to our pension assets. In late December, we executed a $700 million pension lift-out, representing over 8% of our total pension liability and reducing volatility at our pension plan by 10%. Our improved financial condition gave the board the confidence to raise the targeted dividend payout ratio to 60 to 70% of operating earnings. In September, the board had the confidence to raise the quarterly dividend for the first time in more than three years. Of course, subject to board approval, our 2024 plan includes dividend declarations of $1.70 per share versus $1.60 per share in 2023. This represents a 6.25% increase. Going forward, we anticipate growing our dividend with operating earnings growth. The significant improvement in our balance sheet puts First Energy in a growth and investment mode. The fact that we do not expect incremental equity to fund our CapEx growth beyond our employee benefit programs differentiates First Energy from many of our peers. We are introducing a $26 billion five-year capital investment program to improve reliability and our customers' experience. We are branding this program Energize 365, and John will provide more details in his remarks. These investments should enable 9% average annual growth in rate base over the period. We are guiding the $4.3 billion of investment in 2024 an increase of 15% over 2023. Energize 365 represents a significant increase in our investments and rate base with improved earnings quality. We expect to maintain a strong customer affordability position versus our in-state peers. We are reaffirming our 6% to 8% long-term annual operating earnings growth rate. First Energy plans to execute on our long-term growth rate year by year this is why we are announcing a 2024 operating earnings guidance range of two dollars and sixty one cents per share to two dollars and eighty one cents per share the midpoint is seven percent above 2023's operating earnings guidance midpoint turning to slide six let's take a look at our regulatory calendar one of the questions investors have asked is How will we know if First Energy can obtain fair and reasonable regulatory outcomes? The answer that we have given is to look for milestones in our near-term results. In 2023 and early 2024, we have achieved several milestones demonstrating constructive regulatory outcomes. Let me highlight a few. As we mentioned in our last call, we received a reasonable outcome in our Maryland distribution rate case. The Commission there approved a $29 million revenue increase that supports equity returns of 9.5% and an equity ratio of 53%. We are pleased to serve and invest in Maryland to provide reliable and affordable electricity to our customers. In West Virginia, we filed a settlement in our ENEC case with staff and broad intervener support for recovery of $255 million over three years with a carrying cost after year one. The settlement has no disallowances. In January of this year, we filed a settlement in our base rate case with staff and broad intervener support for $105 million rate adjustment based on a 9.8% allowed ROE and a 49.6% equity ratio. This settlement reflects the $700 million increase in rate base since our last base rate case in 2014. Of course, we did not get everything we asked for, but the settlement is fair and constructive, and it demonstrates West Virginia is an attractive place to invest for our customers. In New Jersey, JCP&L filed a base rate case settlement last Friday, with staff and broad intervener support that reflects an $85 million rate adjustment based on an ROE of 9.6% and a 52% equity ratio. The settlement reflects the $400 million increase in rate base since our last base rate case in 2021. The settlement will have a modest 3.4% increase in the average residential bill and JCP&L's rates will be 26% below our in-state peers. If approved, this settlement will be a fair and reasonable outcome that will incentivize JCP&L to make investments to improve customer reliability. In Pennsylvania, we received an order in December approving the consolidation of our Pennsylvania operating companies and approving the transfer of West Penn Power's transmission assets to CADCO. Both transactions were executed on January 1st of this year. We are awaiting commission approval of the filed settlement for the FET minority interest sale, which is anticipated soon. We anticipate filing a base rate case in Pennsylvania by April. For investors looking for milestones of First Energy's ability to receive reasonable and constructive regulatory outcomes, these recent examples provide convincing evidence. In Ohio, We are actively working our way through our ESP5 and GridMod2 cases. We are fully engaged in the regulatory process with staff and interveners and expect constructive outcomes in both cases. We plan to file a base rate case in May. Turning to slide seven, I want to briefly review the new segment reporting that First Energy will adopt in 2024 to reflect how we are managing the company. individual companies will not be split among the segments leading to simplicity and transparency and reporting as well as accountability and management our distribution segment will house our ohio and pennsylvania pure play distribution only companies our pennsylvania consolidation and the transfer of the west pen power transmission assets to catco may make this segment transparent and clean This segment will represent about $10.9 billion in rate base, serve 4.2 million customers, and account for about 45% of forecasted 2024 operating earnings. A senior executive will lead each of FE Pennsylvania and Ohio. Our integrated business segment will report on JCP&L, Potomac Edison, and Monpower, our companies with combinations of distribution, transmission, and generation. This segment will represent about $8.7 billion in rate base, serve 2 million customers, and account for about 35% of forecasted 2024 operating earnings. A senior executive will lead JCP&L, and another will lead Monpower and Potomac Edison. Our last major business segment will be standalone transmission. and it will house our pure play transmission-only companies consisting of our ownership interest in FET as well as CatCo. This segment will represent about $7.7 billion in consolidated rate base and account for about 20% of forecasted 2024 operating earnings. One executive will be responsible for these businesses. Finally, the corporate and other segment will be similar to the current segment with that name. It will report holding company interest, legacy investments, former subsidiaries, and pension and OPEP. A recast of 2023 into the new segments is available in our fact book, and we will provide quarterly and year-to-date reconciliations throughout 2024. Let me provide some key updates on slide eight. In regard to the Ohio Organized Crime Investigations Commission, there's nothing new to report. We continue to cooperate with the commission and answer any questions they ask. The deferred prosecution agreement with the DOJ details First Energy's involvement, and there is nothing new with respect to the company. In the updated climate strategy published to our corporate responsibility website yesterday, we are providing an update to our greenhouse gas emissions goals. In 2020, we set a goal of achieving net carbon neutrality by 2050 with an interim goal of reducing our Scope 1 greenhouse gas emissions by 30% by 2030. Achieving the 2030 interim goal was predicated on meaningful emissions reductions at our Fort Martin and Harrison power plants in West Virginia, which account for approximately 99% of our greenhouse gas emissions. We've identified several challenges to our ability to meet that interim goal, including resource adequacy concerns in the PJM region and state energy policy initiatives. Given these challenges, we have decided to remove our 2030 interim goal. Through regulatory filings in West Virginia, we have forecast the end of the useful life of Fort Martin in 2035 and for Harrison in 2040. We remain focused on achieving our aspirational goal of net carbon neutrality by 2050. In the fourth quarter of last year, we made two key additions to our leadership team. In November, we announced our hiring of Toby Thomas as chief operating officer. Toby joined us from American Electric Power, where he spent more than two decades in various leadership positions, including growing and managing one of the largest wires businesses in the country. He is responsible for system planning and protection, transmission and substation and engineering, project and construction management, and system operations. Wade Smith joined the company in December as the president of First Energy Utilities. He was previously the chief operating officer of Puget Sound Energy. Wade brings more than three decades of experience running large-scale multi-state transmission and distribution companies. The presidents of our five operating businesses will report to him. Ohio, Pennsylvania, JCP&L, our standalone transmission business, and Monpower and Potomac Edison. We are actively reviewing internal and external candidates to run these businesses and expect to make hiring announcements in the coming months. Wade and Toby are key additions to the leadership team that will grow and transform this company into a premier electric utility. In 2023 and continuing into 2024, we have made transformational strides to improve the financial strength of First Energy. We have organized our company with a singular focus on growing our five regulated, mostly wires companies. We are making the investments needed to improve reliability and the customer experience. Our strong balance sheet and organic investment opportunities differentiate First Energy from many of our peers. With that, I will turn the call over to John.
spk14: Thank you, Brian, and good morning, everyone. I'm also very proud of our performance in 2023, and I'm excited to turn a new page in our company's history. Today, I'll briefly review our 2023 results, but more importantly, discuss our enhanced five-year plan and 2024 guidance. Our results in 2023 speak to our employees' dedication and tremendous performance, which included strategic and transformational initiatives. while doing the hard work to meet our financial commitments in a very challenging year and emerge as a stronger, more nimble company. Since I've been at the company, I can't recall a more challenging year in terms of the financial headwinds we faced, including the most abnormal weather conditions that I can remember, the extremely volatile interest rate environment, and the significant impact on our pension plan from the interest rate and equity market performance in 2022. But at the same time, our employees demonstrated their grit and resiliency to overcome these adversities while making strategic advancements to improve our operational and financial performance. Fourth quarter operating earnings were 62 cents a share, which is above the midpoint of our guidance. This compares to 2022 fourth quarter operating earnings of 50 cents a share. For the year, operating earnings were $2.56 a share, also above the midpoint of our guidance range. This represents 7% growth off 2022's guidance midpoint and compares favorably to operating earnings of $2.41 this year in 2022. Fourth quarter and full year results are detailed in the strategic and financial highlights document we posted to our IR website last night. As we pointed to throughout the year, we largely offset the headwinds I mentioned earlier through a strong focus on reduced operating expenses across each of our business units. the deployment of proceeds from the low-cost convertible debt offering in the spring, and certain tax benefits realized in the third quarter. Our focus on operating expenses across the company resulted in a 14% or over $200 million reduction year-over-year, representing a 32 cent per share year-over-year benefit. As we've discussed, about 50% of that represents unique items or work that was accelerated in 22 from 23. The other 50%, which largely includes productivity improvements across the company, lower contractor usage, and reduced corporate spending on areas such as branding and advertising, are sustainable reductions to our cost structure. Our 2023 results benefited from our Formula 8 investment programs across our transmission and distribution businesses, which resulted in a $0.20 per share improvement year over year. As Brian mentioned, we successfully deployed $3.7 billion of capital in 2023, about $300 million, or close to 10%, above our original capital investment plan for the year. In our transmission business, earnings increased 8 cents a share, or close to 10% for the year, primarily from our investment programs, which resulted in rate-based growth of 9% compared to 2022. Formula rate investments in our transmission business were $1.8 billion, an increase of 28% compared to 2022, and $100 million, or 6%, above our original plan due to emergent projects. In our distribution business, earnings declined year over year primarily from the lower weather-related distribution sales and the lower pension credit I spoke of earlier, but also reflect the impact of our formula rate investment programs, new rates that went into effect in Maryland in mid-October, higher weather-adjusted demand, and lower operating costs that I spoke of. Distribution CapEx of $1.9 billion represents an increase of 5% compared to 2022 and exceeded our original plan by $220 million, or 13%, as part of our plan increases we announced last year. Finally, in our corporate segment, 23 results benefited from lower O&M and a consolidated effective tax rate of about 16%, versus nearly 21% in 2022, mostly as a result of planned use of state net operating loss carry forwards. And a final point on 23, as Brian discussed, we executed a $700 million pension lift out in December, representing about 8% of our total pension liability associated with our former generation subsidiaries. Removing this obligation from our balance sheet at a 5% discount will reduce future earnings volatility related to fluctuations in pension assets and liabilities, and lowers overall pension plan costs. We will continue pursuing opportunities to further de-risk the pension plan through additional lift-outs and pursuing pension tracking mechanisms through the regulatory process. Now let's shift gears and talk about our outlook going forward. We are very pleased to introduce our five-year financial plan supporting our commitments to our investors, including 6% to 8% long-term annual operating earnings growth, with significantly improved earnings quality, investment-grade credit metrics, and dividend growth in line with earnings growth. The cornerstone of this plan is a robust, energized 365 grid evolution investment plan of $26 billion, with approximately 75% of plan investments in formula rate programs that provide real-time returns. The plan includes increasing annual investments in our transmission and distribution system each year, resulting in 9 percent average annual rate base growth. Energize 365 supersedes our longstanding Energizing the Future transmission program, which we're sunsetting after a decade of strong performance. Our plan targets investments that improve the customer experience and supports the energy transition or new load requirements, while ensuring a fair and reasonable regulated return for our investors. The capital program is 45% weighted in FERC regulated transmission investments in our standalone transmission and integrated businesses and includes investments to enhance and upgrade the transmission system, add operational flexibility to support projects like New Jersey offshore wind and new data center load, and regulatory required projects. On the distribution system, the plan includes investments by our distribution and integrated segments to improve the customer experience. through reliability enhancements, grid modernization, and clean energy investments such as smart meter deployment, distribution automation, and energy efficiency programs. This comprehensive five-year investment plan is very solid with flexibility to adjust as projects and programs emerge. Over the next couple of years, we anticipate an increase in earnings from our formula rate investment programs, and as we re-rate base distribution rates, for over $19 billion of state-regulated rate base. Our plan builds off the approved or settled base rate cases in Maryland, West Virginia, and New Jersey, our integrated segment, representing $7 billion in rate base that was earning 400 basis points below the allowed returns, as well as scheduled base rate cases in Pennsylvania and Ohio later this year, where we have $12 billion in projected rate base in our distribution segment that is also forecasting to be under-earned. The true-up of returns will allow us to earn closer to our allowed regulated returns and to significantly improve the earnings quality of the company with expected declines in the earnings contribution from signal peak. In longer term, annual rate-based growth with planned investments and formula rate programs, more timely recovery of base capital investments, and cost discipline with our operating expenses will result in less regulatory lag than we've seen historically With modest and reasonable customer bill impacts, we expect our utilities to maintain their strong affordability position and keep rates at or below our in-state peers. Energize 365 will be funded with cash from operations, which we expect to average $4 billion plus annually, building off our 2024 cash flow projections, as well as regulated long-term debt issuances and a portion of the $3.5 billion in proceeds from the FET transaction. And our plan does not include any incremental equity needs beyond our existing employee equity programs, and it supports FFO to debt of 14% to 15%, and FECorp debt at or below 20% of total debt. Our 2024 guidance range of $2.61 to $2.81 a share represents a 7% increase off the midpoint of our 2023 guidance. which will largely be back-end loaded given the timing of new rates in West Virginia and New Jersey and O&M work planned for Q1 of this year. With this in mind, our projections for the first quarter are operating earnings of 48 cents a share to 58 cents a share. To give you some color on the year-over-year increase, our midpoint of $2.71 a share reflects 12% consolidated regulated growth offset by decline in Signal Peak's earnings contributions. The increase reflects new rates and investments, largely from approved or settled base rate cases in our integrated segment, where we anticipate new rates for our West Virginia and New Jersey settlements to be implemented late in the first quarter and ongoing formula rate investments in each of our businesses. A return to normal weather-related customer demand, higher operating expenses reflecting the timing of O&M activities that I spoke of earlier, and new depreciation rates on our fossil generating facilities as part of the settlement we reached in West Virginia. It's important to note that our 2024 planned O&M is $140 million, or 10% below 2022 levels. And when you adjust for timing, such as planned generation outages, our O&M is $100 million, or 6% below 2022, reflecting permanent cost reductions. Other drivers include improved earnings quality from the lower earnings contribution from our signal peak mining asset and a higher effective tax rate. The dilution from the FET transaction is largely offset by lower interest expense, representing planned debt retirements and interest income from the vendor take-back note as part of the FET transaction. Our $4.3 billion capital investment plan for this year represents a 16% increase compared to and is largely funded with $4 billion in cash from operations, which is improved year over year from several unique items that occurred in 2023, such as the $750 million pension contribution, contract termination costs, and severance and employee separation costs, as well as increases from growth and cost recovery in our regulated businesses and improved working capital. With the improvement in cash flow, Closing on our FET minority interest sale and deployment of those proceeds, we're targeting 14% to 15% FFO to debt by year end. 2023 was a challenging but remarkable year, a year of significant transition, innovation, and improvement with outstanding operational and financial execution from our 12,000 employees. Today, our company is in a much stronger position, and we have a comprehensive plan for continued growth. Thank you for your time today, but before we go to Q&A, I'll turn the call back over to Brian.
spk11: Thank you all for joining us today. I'm excited about our company. We're building a strong track record of execution. We have a fantastic business model and a robust plan for the future. Starting with the initial Brookfield and Blackstone investments announced in late 2021, we have significantly improved the balance sheet via $7 billion in equity capital, and it was raised in a very shareholder-friendly manner, the equivalent of issuing common equity at $87 per share. In the past year, we've achieved several important regulatory milestones representing constructive outcomes for First Energy and our customers. This includes $219 million of increased revenues through base rate cases that will fuel our investments in reliable and affordable service. Energize 365, our five-year $26 billion investment plan, is an increase of more than 44% from our previous five-year capital investment plan, and it's funded with organic internal cash flow and utility debt, not incremental equity. We have a long-term six to 8% annual operating earnings growth trajectory with significantly improved earnings quality. This tremendous work together with the cultural changes and focused on continuous improvement has transformed our company. We have accomplished a lot and we're committed to executing on our plan to deliver the full value of this company to shareholders. Now let's open the call to your questions.
spk06: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk05: One moment, please, while we poll for questions. Our first question comes from Shar Paresi with Guggenheim Partners.
spk06: Please proceed with your question. Hey, guys. Good morning.
spk11: Morning, Shar.
spk10: Morning, morning. Just, Brian, good to see the roll forward of the six to eight. I guess as we're thinking about some of sort of the earnings headwinds like signal peak becoming sort of immaterial next year and potential maybe future pension drag, I guess any sense on how we should think about the linearity of that growth off the 24 base? Could we see some maybe near-term gyrations around the six to eight, or do you have enough contingencies to maintain that linearity?
spk11: Sure. It's going to be really linear. We're not going to see much volatility. We're getting back to where a normal utility should look like, where we're going to be investing in our regulated properties and Obviously, a lot of that recovery is going to come through formula-based rates. So that tends to be linear, about 75% through formula-based rates. And then we're going to be regularly going in for rate cases. And it's just the normal cadence of how a utility operates. You invest, you operate, you recover, and you finance. And that's the cadence that we're going to be on.
spk10: Got it. And the 9% rate-based growth is obviously very solid. Is there still... I guess some incremental capex opportunities we should be thinking about in the five-year plan. I know obviously John highlighted some flexibility there in the prepareds. And then any sort of rule of thumb we should think about if there is incremental equity, incremental capex, could it come with incremental equity or you have enough cushion in the credit metrics to not have to tap the equity markets, even if there's incremental capex?
spk11: Yeah, I think we have enough cushion for sure. And we're seeing things like the PJM Open Window 3 that we responded to, where the team worked really hard to put together a solution in a short period of time, and we were able to garner over $800 million of incremental investment through that opportunity. I see more of those coming. They're not in our capital plan yet, and they won't be until we win the projects. But there are significant amounts of... new CapEx that's not in our plan that I anticipate we'll see coming down, and we'll be able to fund that through a combination of cash flow from operations, debt equity issuances, and things like the $3.5 billion of equity that's going to come into our system in 2024 from the transaction. So we're ready to fund these incremental CapEx the way a traditional utility would without having to see much change. access for equity from the equity capital markets.
spk14: I would just reiterate what you said. Had we not done the transactions over the course of the last couple of years, raising $7 billion of equity capital, really at the equivalent of a 36 times PE multiple, we wouldn't be in this position today. I think a lot of it depends on, you know, formula rate capex versus base capital. I think if you look at some of our utility capital structures, you know, they have equity layers that are a little bit better than our targeted, you know, equity capital structures. So we have some flexibility in the plan.
spk10: Perfect. And just real quick, lastly, on just, Brian, I think you answered this, but on the OOCIC process, it doesn't sound like there's any updates. It's status quo, so is it fair to assume, I haven't seen the K yet, but when it's released, we shouldn't see anything surprising in that?
spk11: Yeah, no surprises at all, Char. Status quo, they ask questions, we answer them, and nothing new with regards to the company from what was disclosed in the deferred prosecution agreement.
spk10: Fantastic, guys. Really, Brian, awesome, awesome execution. Appreciate it.
spk11: Thanks, Char.
spk06: Our next question is from Greg Arell with UBS. Please proceed with your question.
spk13: Yeah, thanks. Congratulations on rolling out the new plan. Thank you, Greg. So just on the cash from operations guidance, is the guidance that the new base for growth is $4 billion and you grow off of that or it that's the average over the plan, and there's sort of, it's down, and then you're above that level toward the end of the plan.
spk14: Yeah, Greg, this is John. In all years, it'll be $4 billion or more of cash from operations. You know, some of it will be, you know, just growth in our regulated programs offset by maybe some changes in working capital, but On average, over the five-year period, it'll be north of $4 billion.
spk13: Okay. Maybe just a follow-up for Brian. How do you sort of reconcile the idea of coming forward with the new plan that adds such a significant amount of new capital to the prior plan?
spk11: We're in a different place, Greg. The work that's been done on the balance sheet since 2021, as we laid out, has been truly transformative. For the first time, I think, in the company's history, we're not distracted by M&A. We don't have a competitive arm. We have a strong balance sheet with the opportunity to invest in our regulated mostly wires companies that, to be honest with, we got behind in the capital investment in them. And that's why our rate base is lower. It's why our rates are lower. And it's why we have some significant opportunities with regards to reliability and the customer experience. We are here for the first time ready, willing, and able to put the money into our regulated properties for the benefit of our customers. And it is a significant difference from what you've seen in the past.
spk13: Okay. Thanks a lot. Appreciate it. Thank you.
spk06: Our next question is from Nicholas Campanella with Barclays. Please proceed with your question.
spk15: Hey. Good morning. Happy Friday. Thanks for all the updates. I guess just to follow up on Greg's question, because the CapEx raise is pretty material across the board, obviously it's good to see. How should we kind of think about, you know, customer bill growth to achieve this plan as it relates to just the upcoming filings and then just through the plan as well, please?
spk11: Yeah, so we think the increases will be in the single digit for most of the time for the five-year period. If you look, Nicholas, at page 23 in the fact book that we put out there, in New Jersey through West Virginia and Maryland, our rates are 22% to 30% below our in-state peers. And in Ohio and Pennsylvania, they're 3% to 7% below our in-state peers. A lot of that in New Jersey, West Virginia, and Maryland represents opportunities to invest in the rate base and improve the customer experience. But also more importantly, if you look at things like customer affordability, Between 1997 and 2022, our customer's electricity share of wallet has decreased to 1.3% from 1.6%. So when we talk to smart people who cover our industry and they say that you need to start getting concerned when you're at 4% to 5% share of your customer's wallet, we're nowhere near that. And electricity, whether it's for electricity home heating, whether it's to power your vehicles or whatever, still represents a considerable value for the customers in the states we serve.
spk14: Hey, Nick, this is John, and I'll just add on to that. If you look at the cases where we have approvals or settlements on file in our integrated business, if you just kind of compare to where we were since the last rate case, it's an average of 1% or 1% lower. than the last time, if you do that on an annual basis. And in fact, if you step back a little bit more and just look at the increases in customer bills over the last couple of years, most of that is generation related. And if we were to snap the line today with new generation service, for instance, in Ohio and Pennsylvania, you would see bill decreases of somewhere between four and 8%. Got it.
spk15: That's helpful. And then I guess just kind of similar question on what's embedded in the plan here. And I'm just thinking about earned ROEs. Obviously, New Jersey's pretty low here. That'll improve with the settlement. How do we think about kind of Ohio? And, you know, if you get an improvement versus your slides here, is that baked into the plan? Or just how should we kind of think about that?
spk14: Yeah, as we talked about, you know, the next couple years will be very important as we true up our state-regulated returns to more of their allowed return. So I think about Ohio and Pennsylvania, which will be next to file. Ohio right now is earning sub-6%. Some of that is weather-driven, but we do see an opportunity to true up the return there. And in Pennsylvania, although it's above 9%, a lot of the O&M that's coming back in the system will be in our Pennsylvania company. which will reduce the ROE there. And we use it, you know, projected test year for our Pennsylvania company. So you'll be adding about a billion dollars of rate base between where it is today and the filing that we'll make later this year.
spk15: Okay, and then just one last one, just on the load growth, you know, 1% embedded in the plan. Places like PJM have just continued to see demand revisions higher, and I'm just wondering if that's conservative at all.
spk11: So like capital projects and other things, we don't want to put forecast growth in until we're seeing it. And we're seeing it at about that 1% range. As things develop and go forward, like you've seen data centers in PJM and the like, we think we're going to get that here. You're seeing it to the south of us. You're seeing it to the east of us. And I think that migration will continue into our service territory. In fact, we fully believe it will. And then as you see other things like electrification of transportation and the like, I think there is some upside in the load growth. We just don't want to bake it into the plan until we're seeing it and are confident that it's coming.
spk15: All right. Thanks a lot. Have a great day.
spk11: Thank you, Nicholas. You too.
spk06: Our next question is from Michael Sullivan with Wolf Research. Please proceed with your question.
spk02: Hey, everyone. Good morning. Yeah, hey guys, thanks for all the new disclosures. Just in terms of, you mentioned kind of milestones on the regulatory front, how should we think about GridMod2 and the ESP playing out over the next couple months and how, if any, that can inform the base rate filing coming in May in Ohio?
spk11: Yeah, so we're working those regulatory processes, and you're going to see that from us. You're going to see certain things are in flight and certain things are coming. and look for us to be making progress on what's in flight, and that will foreshadow what's coming down the road. You know, ESP5 and GridMod2 were working through those regulatory processes. I was reviewing last night and will file today our post-hearing briefing on ESP5, and we expect a constructive outcome there, as we do in GridMod2. You know, regulatory tends not to move very fast. These are months-long processes, and we think that the processes in both ESP5 and GridMod 2 are constructive, and we anticipate it'll be the same but an actually longer process for our base rate case, which we'll file in April of this year. So we're just moving along. Things are happening as they should, and we're getting these constructive outcomes.
spk02: Okay, great. And then just on pension and limiting volatility there, can you just give a sense on where we go forward, how much more lift out can potentially be done, and then just how you're feeling about ability to implement mechanisms? I know there was some language around that in some of the cases you already had, but nothing too prescriptive, I don't think. So, yeah, just the path forward on limiting pension volatility. Thank you.
spk14: Yeah, Michael, so we have another $700 million of former generation pension liabilities that we're looking at right now as to whether or not we should execute a lift-out transaction, something that we'll likely do this year if the market conditions warrant that. And then on the regulatory front, as we talked about before, some of these things take a couple of bites at the apple before we can get them in place. We did get authority to at least make a filing in West Virginia and New Jersey as part of the settlements. And we'll be thoughtful once we go through that process and get a final order on the cases as to the next steps there.
spk02: Okay, great. Thanks. And just last one, maybe a little more philosophical, but just seeing kind of how the reporting season has gone so far, I think we've seen a lot of your peers kind of going the other direction in terms of dividends, payout, and growth. And I know you're coming from like a different starting point, but maybe just how you think about that in the context of the sector not trading well and just other levers that you have, how you thought about continuing to grow the dividend with earnings and to pay out where you have it.
spk11: Yeah, so we are at a different place than our peers. Announcing the increase that we did In September, the first in over three years, it's time to start rewarding our shareholders with dividend increases. And we felt that now is the time to do that. So September and anticipated in 2024 increases there as well. It's time for us to treat our shareholders the way utility companies traditionally do. And we're in a place where we're going to be growing the dividend with earnings over time. Our balance sheet is healthy. We don't have the equity needs that some of our peers do because of the transactions that we've done over the last three years or so. So we're in a different place where some of our peers are, and we think it's a really good place. Great.
spk02: Thank you. Thank you.
spk06: Our next question is from Jeremy Tenet with JP Morgan. Please proceed with your question.
spk04: Hi. Good morning.
spk11: Good morning, Jeremy. How are you today?
spk04: Good. Good. Thank you. Just wanted to dive in a little bit more on the guide here, talking about rate-based CAGR of 9% relative to 6% to 8% EPS CAGR. without additional equity needs. So it's just looking to kind of marry those two data points, you know, given the stronger pace of rate-based growth there. If there's anything else we should be thinking about, especially the signal peak and pension OPEB become a smaller part of the equation.
spk11: It's really the things that we mentioned in our remarks. It's going in for base rate cases and updating – rate base, updating returns, cost structure, and those things that haven't been done in some time. You know, the three cases, Maryland, New Jersey, and West Virginia that we've just been in, Pennsylvania and Ohio coming up this year, it's a significant amount of updating the regulatory process and recovery, and then increasing, as we've announced today with Energize 365, the capex that we're going to be investing in our regulated properties going forward. So it's the way utility operations should work. And I repeat this over and over again internally. You invest in your properties and your people. You operate safely, reliably, affordably. You go in for recovery. And if you've done invest and operate well, the recovery component goes better when you're in front of our regulators. And then we come before investors and we tell them the story that we put together on those first three components and financing the companies easier as well. So we're in a place where we're at the beginning of what I call that virtuous cycle. And the success that we've had in the rate cases that I discussed in my prepared remarks show that we're getting those fair and constructive outcomes. And we anticipate that going forward in the plan as well. It all holds together as a credible story where we're having success at the beginning point of that.
spk04: Got it. Maybe to rephrase the question slightly, just if the rate-based CAGR is 9%, are there any other drags besides lag to make EPS growth only 6% to 8% or is that a degree of conservatism?
spk14: So Jeremy, I would say this year, just as you saw in 24, the 24 guide, you saw the step down in signal peak from $0.24 to $0.12. You'll see another step down from $0.24 to $0.25. But at the same time, that's when we're truing up these rate bases that I mentioned in my prepared remarks, the $7 billion this year, the $12 billion that we'll file in Pennsylvania and Ohio for this year. And then after that, it's more traditional rate-based growth, a little bit of regulatory lag, but we're going to do everything we can to minimize, you know, any difference between our earned returns and our allowed returns.
spk11: I think it's important to note that the part that John mentioned about pension and signal peak decreasing, as they decrease and as the traditional regulatory component of our growth increases, our earnings quality improves. And that happens really, really quickly in our plan. So that's also a benefit. It's not just growing earnings. It's a reduced risk profile as well.
spk04: Got it. Thank you for that. Very helpful. And then just wanted to go back, I guess, to, you know, customer bill impacts. I think you quoted something. Helpful numbers there as far as share of wallet that the bill will represent in New Jersey. But just wanted to see, I guess, in Pennsylvania, Ohio, is it kind of similar share of wallet expectations over the forecast period or any color you can provide there?
spk11: It is. The numbers that I gave you of share of wallet was an average across our five states. And it's not significantly different in any one of those, but it's very, very low.
spk04: Got it. Very helpful. I'll leave it there. Thanks.
spk11: Thanks, Jeremy.
spk06: Due to time constraints, we ask that you please limit to one question. Our next question comes from Michael Lonegan with Evercore ISI. Please proceed with your question.
spk16: Hi. Good morning. Thanks for taking my question.
spk11: Good morning, Michael.
spk16: So you've talked about, you know, some sustainable O&M you've taken out of your business and you know, a larger increase this year. And then after that, a calling for less than 2% increases over time. You know, given the significant ramp up in CapEx, you know, over the years of your planning period, you know, presumably you'd have to expand your workforce or use of contractors, you know, if my guess to, you know, work on complete all those projects. I was just wondering, you know, how are you planning on managing your O&M within that 2% increase level? Is there room to take out more existing costs out of the business?
spk11: So I'll say this. A lot of what we talked about is actually CapEx that we're increasing. So it's not directly related to O&M. We recognize there's an O&M tail that's associated with any incremental CapEx, but we're going to be very, very focused on continuous improvement. And it's going to be part of our story that we're going to tell every time we're getting together going forward about what we've been able to do and how we've been able to reduce O&M through continuous improvement. And it's just going to be part of our story going forward like it was in 2023. And you see well-functioning premium utilities are always talking about what they're doing in that regard. And we've had success here in our recent past doing that. and we anticipate that going forward.
spk06: Great. Thank you very much.
spk11: Thank you, Michael.
spk06: Our next question comes from Angie Sterinsky with Seaport Global. Please proceed with your question.
spk00: Good morning. So I wanted just a bigger picture question. So investors seem excited about the load growth, accelerating load growth associated with data centers. you know, the obvious way to play this trend is through generation companies, but also through vertically integrated utilities that actually own generation. You guys, except for Virginia, are a wires-only business, and I'm just wondering if you do expect to have this secondary benefit associated with the load growth, again, translating into either higher T&D capex or maybe improved, you know, affordability because of higher volumes. I mean, you name it. Just wondering if you see that benefit accruing to you as well.
spk11: And thank you for the question, Angie. We absolutely do. And you're right, being mostly a wires company, certainly in four of our five states, we don't have as much of the generation opportunity. But I mentioned in my remarks, or in answer to an earlier question, the opportunity that we had associated with the PJM Open Window 3 for incremental transmission investment over $800 million. I had the pleasure of going out to our Maryland service territory late last year and got to go see what's going on at that quantum loophole data center development. It is unbelievable what's going on out there. They are recreating something that's on the scale of the data center footprint in northern Virginia, out kind of in the hills of western Maryland. And it's at a site of a former aluminum smelter out there. So you have these high voltage transmission lines that go and just stop in the middle of space where the smelter used to be. And where they're investing, they're turning dirt, they're moving ground right now. to build one of the largest data center complexes in the world. So we're seeing it in Maryland. It's going to be coming to Pennsylvania and Ohio for us as well, and we're hopeful for New Jersey and West Virginia over time. So it's coming, and it's real, and it does create incremental investment opportunities for us.
spk00: And then just one last follow-up. So you mentioned affordability. you know, your rates are obviously so much lower than your peers. Your assets seem underinvested when you look at rate base per customer. But I'm just wondering, because all of these investments or acceleration of investments happens in a low power price environment, you know, given the load growth, this low power price environment is not sustainable. So I'm just wondering what happens to that investment plan when the power price is go up meaningfully and so the customer bill meaningfully increases because of that commodity component.
spk11: So that's a good question, Angie. I think we've already seen some of that associated with things like the war in Ukraine and the like, and we saw that in some of the polar prices that we have when we went out for auctions during the period when we thought prices were going to be really, really high because of what's going on in Europe. And some of those price spikes went through to our customers really in Ohio beginning like the day I started on June 1st of last year. So we saw some of those price spikes go through to customer rates, and now they're coming off. As John mentioned earlier, we're having auctions that are printing lower prices, and those lower prices are passing through to our customers. So, you know, I don't see that as being a big concern. There are some things that are moderating that impact, And again, our prices are so low, the share of wallet is so low for us, that electricity still represents a significant value to customers in all five of our states.
spk06: Great. Thank you.
spk11: Thank you, Angie.
spk06: Our next question comes from Paul Patterson with Glenrock Associates. Please proceed with your question. Hey, guys.
spk12: Congratulations. Just wanted to sort of touch base again, I apologize, on this single-digit increase. Is that rates or is it bills? And can you be a little bit more specific in terms of what that means? I mean, obviously, there's a big range there, right? Just a little bit more elaboration as to what you see sort of the rate trajectory range being associated with what you're planning long-term. Okay.
spk14: Well, Paul, so this is John. So I would tell you that, you know, as we think about the cases that we filed this year, the increases since the last rate case are single digits, like low, low single digits. So on average... New Jersey was 3.4%. Yep. But on an average basis since the last rate case, it's probably less than 1% a year.
spk12: And that's what you see going forward? Low single digits is what you guys mean?
spk14: Well, I think you've got to think of it this way. We haven't been in for a rate case in Pennsylvania for quite some time. Ohio, we haven't been in in almost over a decade. So I do think there'll be some increases there, but when you average it out since the time of the last rate case, it's very manageable.
spk12: Okay. And then finally, on grid mark, do you see any settlement possibility? I know you guys sort of had thought about that before. There was sort of a delay in staff testimony. It looks like you're now talking about hearings. You expect that to be fully litigated at this point?
spk11: Look, we're always open to the settlement option and think that's always preferable. If we're going to go to hearing like we have in ESP5, we're okay with that. We think we'll get positive outcomes. In any regard, Paul, the settlement discussions that we have start to frame people's positions for where they'll be at the table at a hearing. And so we view it as being a constructive process, even if we have to go to hearing.
spk12: Okay.
spk06: I'll leave it there. Thanks so much, guys. Have a good weekend.
spk11: Thank you, Paul. Thanks. You too.
spk06: Our next question comes from David Arcaro with Morgan Stanley. Please proceed with your question.
spk07: Hey, good morning. Thanks for taking the question. I was just wondering, could you refresh us on any strategic options that might be available for the Signal Peak business as you're thinking about that now?
spk14: In this environment, there's not a lot of options. Obviously, we look at that quite frequently. It's not a core business for us. We've looked at that in the past several times. It's just there's not a lot of buyers out there, and so the options are fairly limited. But if you think about it in the grand scheme of things, it's going to be such a de minimis part of our company moving forward that it's not going to have the same impact that it's had the last couple of years.
spk06: Of course. Great. That makes sense. Thanks.
spk11: Thanks, David.
spk06: Our next question comes from Sophia Karp with KeyBank Capital Markets. Please proceed with your question.
spk09: Hi. Good morning. Thank you for squeezing me in here. Good morning, Sophia. Most of my questions have been answered. Yeah, most of my questions have been answered. Maybe I can just ask you about the balance sheet. Are you completely happy with the balance sheet shape at this point? And if not, what are the incremental goals here in terms of credit ratings, incremental balance sheet strength, or are you completely satisfied if you're kind of done?
spk11: Thank you for the question, Sofia. We are really pleased with the shape of the balance sheet at this point. We're going to get the incremental $3.5 billion in the door in 2024, most of that coming in March of this year, anticipated with the Brookfield transaction. That caps off what's a total of about a $7 billion raise over the last three years. You know, that work has been intentional and purposeful by the board and the management team even before I got here for sure. to strengthen that balance sheet so we'd be in the position that we are today to be able to invest the way that we've laid out for you today in our regulated properties. We anticipate by the end of 2024 of being at a 14% to 15% FFO to debt range, and we're anticipating rating agency positive actions associated with the strength of our balance sheet. So we're really, really pleased with where we are from a balance sheet strength situation.
spk14: Yeah, and Sophie, I would just add, you know, if you think about where the company has come from, withholding company debt probably in the 30% plus range. Today, it's 26% with a plan to get it to 20% or better by 2026. And that's a strong story. And it really started back in late 2021 when we announced the the equity transactions with Blackstone and Brookfield, and then we followed it up with a second transaction with FET for another $3.5 billion. And we all did that in a very shareholder-friendly way. So we're excited about where the balance sheet's headed, and we wouldn't have this capital plan without the strong balance sheet that we have.
spk09: Got it. Thank you so much.
spk06: Thank you, Sukya. Our next question is from Anthony Crodell with Mizuho. Please proceed with your question.
spk03: Hey, good morning. Thanks for squeezing me in. I had five questions. Sorry to ask them all, though. But just, I guess, quickly, Brian, you've had a big eight months. Appreciate the CapEx update. It seems that you've accomplished a lot of what you were planning. Just the year ahead, what should we expect?
spk11: So I think more of the same, Anthony. Thank you for the question. So we've talked about how we're reorganizing the company, about how we're changing the segment reporting to reflect that. I mentioned some of the key hires that we made at the end of 2023. We have six more key hires that we need to make. The five people to run our major businesses and a shared services executive that we're looking for as well. So As we make progress on that, we'll then have the team ready to help move in the direction that we've laid out for you and execute against the plan that we've described today. So it's really getting the right people in the right seats to manage the company the way that we've laid out for you and execute against the fantastic plan that we have. Great. Again, congrats.
spk03: Thanks again for taking the question.
spk11: Thank you, Anthony.
spk06: We have reached the end of the question and answer session, and this concludes today's conference for today. You may disconnect your lines at this time, and we thank you for your participation.
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