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spk12: Greetings and welcome to the First Energy Corp Second Quarter 2021 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's now my pleasure to introduce your host, Irene Prezell, Vice President Investor Relations for First Energy Corp. Thank you, Ms. Prezell. Please begin.
spk01: Thank you and welcome to our second quarter earnings call. Today we will make various forward-looking statements regarding revenues, earnings, performance, strategies, prospects, and other matters. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results differ materially from those indicated by these statements can be found on the investor section of our website under the earnings information link and in our SEC filing. We will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures, the presentation that supports today's discussion, and other detailed information about the quarter can be found on the strategic and financial highlights document on the investor section of our website. Participants in today's call include our President and Chief Executive Officer, Steve Straw, Vice Chairperson and Executive Director John Sommerhalder, 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. Now I'll turn the call over to Steve.
spk10: Thank you, Irene, and good morning, everyone. Yesterday afternoon, we reported second quarter 2021 GAAP earnings of 11 cents per share. which includes the impact of the deferred prosecution agreement that I'll discuss in a moment. Operating earnings were 59 cents per share, which is above the top end of our earnings guidance. These strong operational results reflect a customer-focused investment strategy in our regulated distribution and transmission businesses, solid financial discipline, and the continued shift in higher weather-adjusted demand from our residential customers. We're pleased with our performance as well as the substantial progress we've made to transform First Energy and position our company for the future. We have taken critical steps to build a best-in-class compliance program while identifying and driving initiatives to deliver long-term value to all stakeholders. Our leadership team is committed to modeling the behaviors and the humility necessary to restore trust with our stakeholders. We look forward to continuing this work and achieving the milestones that will mark our progress. I'll start our call today with an update on the DOJ and other investigations related to House Bill 6. And John Sommerhalder will join us for a brief discussion on board activity and the progress of our compliance program. I'll come back to review recent business developments, and then John Taylor will discuss our second quarter results and other financial matters before we open it up to your questions. Yesterday, we announced that we've entered into an agreement with the U.S. Attorney's Office for the Southern District of Ohio to resolve the DOJ investigation into First Energy. This deferred prosecution agreement was filed in federal court. Under the three-year deferred prosecution agreement, we agreed to pay $230 million, which will be funded with cash on hand. Half of these funds is designated for the US Treasury, and the other half is being directed to the benefit of utility customers by the Ohio Development Service Agency. No portion of the fine will be recovered from customers. We also agreed to the government's single charge of honest services wire fraud, which will be eventually dismissed provided we abide by all the terms of the agreement. In accordance with the agreement, we will provide regular reports to the government regarding our compliance program, as well as internal controls and policies and continued efforts to build on the comprehensive compliance initiatives we've rolled out this year. In its decision to defer prosecution, the U.S. Attorney's Office acknowledged our substantial cooperation with the investigation, along with our significant remedial actions, which include establishing an executive director position at the board level, as well as a compliance-focused board subcommittee. hiring a new chief legal officer and a new chief ethics and compliance officer, working to establish a culture of ethics, integrity, and accountability at every level of the organization, and reviewing and revising political activity and lobbying and consulting policies, which will include robust disclosures about our lobbying activities. The conduct that took place at our company was wrong and unacceptable. Our board, the management team, and the entire First Energy organization have done extensive work and are committed to make the necessary changes to move on from this. Our progress on these efforts, along with the DPA, demonstrate that we are making meaningful headway in navigating through this period. and we are positioned to move forward as a stronger integrity-bound organization. We will continue to cooperate fully with the ongoing investigations, audits, and related matters as we work to resolve these issues and rebuild trust with our employees, customers, regulators, and investors. We are intently focused on fostering a strong culture of compliance and ethics, and assuring that we have robust processes in place designed to ensure that nothing like this happens again. In May, we held our first compliance town hall with employees to discuss what compliance, ethics, and integrity mean at First Energy, and the importance of building a culture of trust where everyone is comfortable with speaking up when something doesn't feel right. In the weeks following the town hall, our management team has responded to employee questions and concerns, and we are committed to continuing this conversation and engagement. Next week, we plan to hold another town hall meeting with employees where we will introduce our updated mission statement, reinforcing the role of uncompromising integrity as the cornerstone of First Energy's identity and business strategies. We will also refresh our core values to better reflect the importance of integrity, together with safety, diversity, equity, and inclusion, performance excellence, and stewardship. These values will be embedded in our practices and processes and become ingrained in the way we work. Additionally, we updated our code of business conduct, which John Summerhalder we'll speak to in a moment. We also continue to strengthen our leadership team with two more new hires. Michael Montague joined us earlier this month as Vice President, Internal Audit. And yesterday, we announced that Subhagya Parija has been named Vice President and Chief Risk Officer, effective August 16th. These two experienced professionals represent another important step as we strengthen our key internal functions, and I'm confident that they will help us develop best-in-class audit and enterprise risk programs. Now, John Sommerhalder will join us to provide an update on board matters and other facets of our compliance program. Then I'll be back to discuss FE Forward and review some regulatory updates.
spk05: Thanks, Steve. Our progress with the DOJ builds on the substantial steps we have taken to enhance our board, strengthen our leadership team, ensure we have a best-in-class compliance program, and significantly modify our approach to political engagement as we work to regain the trust of our stakeholders. I'll start with a review of recent board changes. As you know, Jesse Lynn and Andrew Tino joined the board from ICON Capital in March, but they do not currently have voting rights pending regulatory approval. I'm pleased to note that FERC approved our request for voting rights last week. The process in Maryland continues as we have communicated FERC's recent action to the Commission. Melvin Williams was elected to the Board at our annual meeting in May, and last month we added two more independent directors. Lisa Winston-Hicks, and Paul Coletta. Jesse, Melvin, Lisa, and Paul comprise our special litigation committee. This committee has full and binding authority to determine the company's action with respect to the pending shareholder derivative litigation. I'll also note that with the formation of the special litigation committee, the board has dissolved the demand review committee. As previously discussed, The company's internal investigation has now been transitioned from a proactive to a response mode. And in light of the significant review, investigation, and related actions accomplished by the independent review committee, the board has also dissolved that committee. The many proactive actions taken by the board and management over the past year have improved our governance, and put us in a strong position to remediate the material weakness associated with our tone at the top by the time we file our fourth quarter results. Over the last several quarters, we've talked a lot about the work we're doing to elevate our ethics and compliance program and reinforce our values and expectations with all employees. We continue to make timely progress in this area. and our new, more centralized compliance organization is taking shape under Antonio Fernandez, who joined the company in April as our chief ethics and compliance officer. Yesterday, we published our updated internal code of business conduct, the power of integrity, which will be supported by ongoing education around behaviors and the importance of reporting ethical violations. And we have continued to strengthen our policies, processes, and internal controls, including those around 501c4s, other corporate engagement and advocacy, and business disbursements. While the transformation of our culture and our steps to restore trust with all stakeholders will be long-term endeavors, this team has started building a stronger company built around a foundation of ethics, honesty, and accountability. Now, I'll turn it back to Steve.
spk10: Thanks, John. The comprehensive assessment and recalibration of our ethics and compliance program has been running on a parallel path to FE Forward. Our transformational effort to enhance value for all stakeholders by investing in modern and distinctive experiences that will improve the way we do business. We have improved our programmatic efforts to mature our ethics and compliance program into the FE Forward work. In this way, we can leverage FE Forward's rigor to implement changes quickly and efficiently, embed ethics and compliance into our operational culture, and ensure we sustain a comprehensive transformation well into the future. FE Forward has entered its third phase, which is a full-scale effort to execute our implementation plans. The program is expected to deliver value and resilience, including cumulative free cash flow improvements of approximately $800 million from 2021 through 2023, and an annual run rate CapEx efficiencies of about $300 million in 2024 and beyond. At the same time, we expect the program to build on our strong operations and business fundamentals as we reinvest a portion of our efficiencies into strategic opportunities to better serve our customers and support a smarter and cleaner electric grid. To ensure our organizational structure supports these improvements over the long term, we realigned our business units last month around five pillars. Finance and strategy, human resources and corporate services, legal, operations, and customer experience. This new structure reflects a best-in-class model and supports operational excellence clarity in decision-making and accountability, and less complexity. As part of this new organizational structure, we've created a customer experience function that will truly understand our customers' evolving expectations so we can develop solutions and drive benefits to customers. We've also created a new position, Vice President Transformation, to shepherd the FE Forward initiatives across our company while also developing customer-focused emerging technology opportunities. The development of executable plans, a best-in-class compliance program, and critical organizational changes will position the company to move forward in a positive, sustainable direction. I'll just take a moment now and review recent regulatory matters, starting in Ohio. First, in July, the PUCO approved our filing to return approximately $27 million to our Ohio utility customers, representing all revenues that were previously collected through the decoupling mechanism, plus interest. Our Ohio utilities have filed supplemental testimony in the quadrennial review of our ESP4. We are committed to working with a broad range of parties in Ohio to resolve the range of issues that are still pending here. We held our first full-scale collaborative meeting on March 31st and have since received further feedback from participants. We are preparing for another collaborative meeting in the next few weeks. We are also working through regulatory audits in Ohio, New Jersey, Pennsylvania, and the FERC. Finally, in April, the New Jersey BPU approved JCP&L's three-year $203 million energy efficiency and conservation plan, which includes a return on certain costs, as well as the ability to recover lost distribution revenues. As for our financial results, we're pleased with our strong performance in the first half of the year. We are reaffirming our 2021 operating earnings guidance of $2.40 to $2.60 per share, and we expect to be at the top half of that range. We are also introducing third quarter guidance of $0.70 to $0.80 per share. We remain focused on executing our plans, maintaining our costs, and building on this positive momentum. We are making substantial progress to transform First Energy, live up to our values, and deliver long-term value to all of our stakeholders. Thank you for your time, and now I'll turn the call over to John Taylor for a review of second quarter results and a financial update.
spk02: Thanks, Steve, and good morning, everyone. Yesterday, we announced gap earnings of 11 cents per share for the second quarter of 2021 and operating earnings of 59 cents per share. As Steve mentioned, this exceeded the top end of our guidance range. Special items in the second quarter of 2021 include investigation and other related costs, which include the impact from the Deferred Prosecution Agreement, as well as regulatory charges and state tax legislative changes. In our distribution business, 2021 second quarter results, as compared to 2020, reflect growth from our capital investment programs, rate increases, and lower expenses, primarily related to the absence of pandemic-related expenses we incurred in the second quarter of last year. Partially offset by the absence of Ohio decoupling and lost distribution revenues in the second quarter of 2020, which we stopped collecting earlier this year. Total distribution deliveries increased on both an actual and weather-adjusted basis compared to the second quarter of 2020, when many of the pandemic-related restrictions were in full effect. However, the mix of customer usage resulted in a flat year-over-year earnings impact. Second quarter 2021 weather-adjusted residential sales were 6 percent lower than the same period last year, when many of our customers were under strict stay-at-home orders. However, as we look at trends, weather-adjusted residential usage over the past few quarters has been on average about 4% higher than pre-pandemic levels, and in fact, the second quarter of this year was close to 8% higher than weather-adjusted usage we saw in the second quarter of 2019. We think more permanent work-from-home initiatives could impact our longer-term load forecast, and we will be watching closely to see if this structural shift in our residential customer class continues. Weather-adjusted deliveries to commercial customers increased 8 percent and industrial load increased 11 percent as compared to the second quarter of 2020. Despite the increase in commercial activity this spring, weather-adjusted demand in this customer class continues to lag pre-pandemic levels by an average of about 6%. Looking at the industrial class, we are encouraged by the steady recovery in demand over the past year. In fact, this quarter industrial load was only slightly down compared to the second quarter of 2019. We continue to see higher load from the shale gas industry, but that was offset by lower load in other industrial sectors, such as steel, auto, and mining, which have not fully recovered to pre-pandemic levels. In our regulated transmission segment, higher net financing costs in the second quarter of 2021, primarily related to our revolving credit facility borrowings, were more than offset by the impact of higher transmission investment at MATE and ATSI related to our Energizing the Future program. Our transmission investments drove year-over-year rate-based growth of 7%. And in our corporate segment, Results reflect the absence of discrete tax benefits recognized in the second quarter of 2020, as well as higher interest expense. For the first half of 2021, operating earnings were $1.28 per share compared to $1.23 per share in the first half of 2020. This increase was the result of continued investments in our transmission and distribution systems, weather-related sales, and lower expenses. And consistent with our second quarter results, the positive drivers for the first half of this year more than offset the absence of 13 cents of decoupling and lost distribution revenues that were recognized in the first half of 2020 but are no longer in place this year. Additionally, our continued focus on financial discipline together with strong financial results helped drive a $196 million increase in adjusted cash from operations versus our internal plan and a $264 million increase above the first six months of last year, building on the improvements we noted on our first quarter earnings call. As for capital markets activity, we continue making good progress on this year's debt financing plan with five of our six debt transactions complete, all with pricing similar to investment-grade companies. In May, we issued $150 million in senior notes at Toledo Edison and May with pricing at 2.65% and 2.55% respectively. And in June, we issued $500 million in senior notes at JCP&L that priced at 2.75%. In addition, we made progress on our commitment to reduce short-term debt during the second quarter by repaying $950 million under our revolving credit facilities, bringing our borrowings down to $500 million as of June 30th. And earlier this week, we repaid the remaining $500 million under these facilities. While we did obtain a waiver for our credit facilities related to the DPA, this repayment was voluntary and not required by the bank group. We plan to operate on a normal course going forward and will utilize the revolving credit facilities on an as-needed basis as we have done historically. As you know, we have two revolving credit facilities, one for FECorp, which is shared with our utility companies, and one for FET, both expiring in December of 2022. Over the next few months, we plan to work with our bank group to evaluate and refinance these bank facilities with the goal of completing this initiative before the end of the year. And finally, we continue to consider alternatives to our equity needs. We continue to think through options that include a minority sale of distribution and or transmission assets, which would raise substantial proceeds and eliminate all of our expected non-SIP equity needs, ensure the execution of our balance sheet improvement plans, and provide funding for strategic CapEx and customer-focused emerging technologies. that support the transition to a cleaner electric grid. Based on our current timeframe, we expect to provide you with an update in the fourth quarter. As always, thank you for your time and your interest in First Energy. I'd be happy to take your questions.
spk12: Thank you. At this time, we'll now 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. Our first question comes from the line of Char Parisa with Guggenheim Partners. Please proceed with your question.
spk16: Good morning, Steve and John. How are you doing?
spk02: Good, Char. Doing well.
spk16: So just a Just on the asset sale, obviously, you kind of mentioned you're still exploring options, even though sort of the DPA came in lighter than expected, that many expected. Is the main consideration here, is it, you know, I'm just trying to figure out, is it potential shareholder litigation? Is it kind of to capture some of the multiple arbitrage opportunities with what sort of infrastructure and various strategics have been willing to pay for assets recently? I mean, have your base, I guess, equity needs increased? And then just as a follow-up, you know, media has reported Monpower as the potential sale option. So can you maybe just confirm what states you see as non-core to the overall enterprise? And I wish you maybe think about potential sizing of a smaller utility like Monpower versus a minority stake versus a potential larger optimization, like just saying JCP and all as an example.
spk02: Well, Char, this is John. So I'll take that, and if Steve wants to add on, I'd be happy to do that as well. But I think for us, the priority is around ensuring that we achieve our balance sheet metrics. We have goals of 12% to 13%. We likely will face some additional headwinds with different types of litigation. We've got some things cooking in Ohio that we need to deal with. And so, you know, providing balance sheet support at an efficient cost is the number one priority. With respect to the different assets, you know, I'm not going to get into specifics, but I will tell you that we've made a tremendous amount of progress since the first quarter. We are getting more and more comfortable with a minority interest sale in one of our assets, and we're fairly confident that that's the right path forward. We think we can do this in a way that limits dilution to shareholders but can raise a significant amount of capital that would eliminate all of our current equity needs. It would achieve our priorities around the balance sheet, provide funding for additional CapEx opportunities, all acknowledging the fact that we have additional headwinds that we're going to face.
spk16: Got it. So near-term credit and earnings accretive transaction.
spk02: Correct.
spk16: Yeah, correct. Perfect. And then just lastly for me, and I'll pass it off to someone else, I'm glad, you know, clearly we're moving, we're starting to move past all of this, which is a great, great, great signal here. How do we think about maybe the DPA statement of facts as it relates to the overall construct in Ohio. I mean, you have a rate agreement in place, but curious if this can even be revisited in light of the findings. I mean, have you had any conversations with the PUCO following the DPA more specifically?
spk10: Shar, this is Steve. Thanks for the question. I think I'm going to start just with a few comments on the DPA and then quickly move to Ohio. This is truly a humbling moment for our company in terms of the DPA, the accountability that we stepped up and took as a company. So, we're humbled by it, but we do view it as a very positive step for the company, with many more steps down the path to restore confidence and trust. Along the way within the DPA, obviously, we paid a significant penalty for accountability, and we take that on and acknowledge that. We're also going to continue to stay very focused as a team to remain fully compliant with all the requirements of the DPA, and fulfilling those requirements will be very, very important for us, as well as continued cooperation with the DOJ. Globally, believe this is really an inflection point, not only for me as the leader of the organization, but for our company in general. We have a great opportunity as we walk through this challenge really to show that we can create a much better company and a much better path forward. So we're really looking forward to do that, and you will see that change, and it will be at its center having ethics and integrity at every level within this organization. So I just wanted to make those statements on the DPA. As it pertains to Ohio, it's a good question. We have a collaborative underway right now. We've had one meeting. We're hoping to organize another meeting within the next several weeks. So we want to respect that process and not speculate too much. But we're confident that we can make significant progress in terms of restoring trust and confidence in the regulatory process. So it's our hope that we can put everything that's on the collective agenda for the collaborative on the table, discuss it, deal with it, and be able to come up with a reasonable solution. our ESP4, our base rate case question that we get from time to time. I believe those are one of the elements that are on the table that we're very willing to discuss. I would also point back just a little bit, Char, to what we have accomplished in Ohio with regard to not pursuing loss distribution revenue, the refund of decoupling. We have the reestablishment of the 2024 base rate case requirement. And I think the DPA, now that it's behind us, will open up more opportunities for a pathway forward in Ohio.
spk16: Terrific. Thank you so much, and best of luck, Steve, in trying to get FE2 in the next phase. I appreciate it. Thank you.
spk10: Thank you, Char.
spk12: Thank you. Our next question comes from the line of Jeremy Tonei with J.P. Morgan. Please proceed with your question.
spk04: Hi. Good morning.
spk10: Good morning.
spk04: I just want to follow up a bit with, I guess, the update in the fourth quarter here. I just want to clarify, is that?
spk03: Is the fourth quarter update, is that during the quarter or is that with fourth quarter earnings? And it seems like it's a bit of a while off, so just wondering, is this like a formal kind of bookending announcement that, you know, accomplishes everything at that point in last part here, I guess, if you're thinking about potential minority interest modernizations, and we've seen these great valuation markers out there, just wondering if there's, you know, how much you'd pursue here, whether it is, you know, just solving all equity needs, including pension shortfalls, what have you.
spk02: So, Jeremy, this is John. So, yeah, fourth quarter. So, you know, sometime in the fourth quarter, not the fourth quarter call, you know, we'll provide an update on you know, our plan for equity financing. And so with respect to quantum, you know, we'll have to see. I would tell you this, you know, right now we have a billion dollars of non-SIP equity in 22 and 23. If you just assume $40 a share, that's about 12 cents in dilution. If I sold 12 cents in regulated earnings at a 32 multiple, that'd be about $2 billion in proceeds.
spk03: Got it. That's very helpful there. And then kind of shifting gears a bit, I guess, you know, towards transmission, just wondering if you had some thoughts on, you know, federal infrastructure, you know, plan possibly here and at FERC, some of the different things coming out of there, just wondering how FD thinks about that and what opportunities that you see on the transmission side at this point, you know, possibly expanding depending on kind of what happens out of D.C. there.
spk10: Well, very good question. Thank you. This is Steve. I would say it represents an opportunity for our company based on what I've been able to see from the current administration. We have, over the course of the last six to seven years, developed a true core component. competency in terms of being able to construct transmission projects and be able to extract the value that's needed to support a reliable grid. And I think that core competency now can be unleashed with any infrastructure plan that is developed and approved through the administration and Congress. So I see that as a very good opportunity for our company.
spk03: Got it. That's helpful. I'll stop there. Thank you. Thank you.
spk12: Thank you. Our next question comes from the line of Steven Burke with Morgan Stanley. Please proceed with your question.
spk09: Hi. Good morning. Thanks for taking my questions.
spk10: Good morning.
spk09: I wanted to just talk at a high level in terms of your business and the potential for the need for additional grid upgrades, improvements, transmission spend. Just as you're thinking at a high level, I know there's been a lot of focus on, rightly so, on addressing this DOJ investigation. But just now that, you know, we're hopefully, you know, in a position to be able to look forward a bit, how do you see sort of the potential areas of growth, or maybe more differently, what areas of growth are you most excited about in terms of adding to the base plan? What might we see over time?
spk10: Well, Steve, I think we have an excellent base business plan. Let's just start there. Our transmission spend, if you call it a billion to a billion two per year, that's a very sustainable pipeline of needed work that will span the next two-decade period. So we're excited about the infrastructure program that might be coming forward. We're excited about leveraging our transmission system and embracing renewables as they approach the system as an opportunity. On the distribution side of the house, I'm particularly excited about some of the programs that we have going on right now with smart grid, smart meter programs, I also believe that our company, as well as the utility industry, can play a central and key role relative to the infrastructure build-out for electric vehicles, battery storage, and other emerging technologies. I think that all represents a great opportunity for us. I also try to keep the customer in the center of that equation. As these emerging technologies are lowering in costs, I think that's good for customers. And once again, I think a company like ours could install these technologies in the best way possible on the T&D system to maximize their value at a low cost.
spk09: That's helpful. And as you're thinking about sort of your growth plans from here, is there a natural sort of process that the First Energy would go through and sort of just continuing to reassess those types of additional needs? So, for example, is there sort of a planning process in the fall followed by, you know, some degree of an update we could expect next year in terms of just your thinking on where you go from here from a growth perspective?
spk02: Yeah, Stephen, so this is John. So I think, you know, there's a couple of things that we need to work through You know, before we move to providing long-term guidance, obviously we have, you know, some issues that we need to resolve in Ohio. You know, we have probably five to six different proceedings. We got the collaborative that we're working through. So we need to really have some clarity around our Ohio utilities. And then I think we also need to have a little bit more clarity and certainty around our equity plan. And then once we have those two things, I think we can get into providing more of a long-term guidance range for you.
spk09: Very fair point. Last question, just maybe going back to the deferred prosecution agreement. There's a lot of commitments here. I was just curious, as you think about factoring these types of commitments into things like executive compensation, changes to sort of goals that you lay out that are backed by real impact to executive comp, how might we expect these types of commitments to be factored into compensation of executives?
spk10: Well, you know, Stephen, I don't think we've talked that through. What we've already done, for example, this year, we've integrated a compliance goal into our incentive compensation program for all employees. So we want to acknowledge positive behaviors in terms of raising issues and acknowledge that, look, folks are speaking up. We also want to get at other parts of our company in which we might be challenged from an ethics or integrity view. So that work is already underway. And as we've stated not only in our opening comments but prior to that, You know, we're going to make ethics, integrity, and openness every bit as important in this company as safety is to this company. And that, for us, puts it right at the very top of our focus each and every day, each and every moment. So while we will talk through additional compensation matters, I'm sure, in the future, like every company does, to challenge ourselves personally, or goals that really truly make a difference in performance and propels you forward. We are really just very, very focused on implementing our new code of conduct that John mentioned, and then also the build-out of a best-in-class compliance and ethics program.
spk09: Understood. Thanks so much.
spk10: Thank you.
spk12: Thank you. Our next question comes from the line. Julian Doman Smith with Bank of America. Please proceed with your question.
spk06: Hey, good morning. Thank you for the time and the opportunity. So if I could try to rehash or restate some of this a little bit differently, when you think about where you'll be by year end, I mean, could we be in a place to effectively re-baseline and provide a clean forward outlook, if you will? I mean, effectively, if we're hearing you right, Aspirationally, you'll have addressed the equity needs in a single shot here with a minority sale or something of the like. Ohio should be resolved to the extent to which stakeholders are amenable, including conceivably the next DSP. And ultimately, you have an O&M program underway that should conceivably keep you within the 12% to 13% of devoted debt, as you've already talked about in the past. Can you just kind of affirm to the... thought process and specifically, you know, when or if you would think about an updated EPS outlook in turn?
spk02: Yeah, Julian, this is John. Yeah, Julian, this is John. So I think for sure we will have clarity around our equity plan in the fourth quarter. I think we will do our absolute best to work with the parties down in Columbus to get some resolution there. You know, I don't know how long that's going to take. But if we could get something by the end of the year, that would be fantastic. And we would be in a position at that point in time to provide you a long-term outlook, including earnings and cash flow.
spk10: Yeah, and this is Steve. I would just underscore one of John's points here. I would be very pleased to resolve the Ohio issues by year end, for sure. But I am determined to do it in a way in which it truly is collaborative. So we are not going to be in a rush to do something that's going to upend the process unnecessarily, but my true hope is that everybody will come to the table with progress and openness on their minds.
spk06: Yes, I very much appreciate it. And if I could clarify the epithet of that commentary and just overall balance sheet needs right i mean you obviously previously articulated this equity need through the forecast period but as you think about sizing this updated need today i just want to make sure we understand the baseline should be that you were already poised to achieve the 12 to 13 such that if you want to triangulate here any incremental needs created from resolution in ohio or regulatory decisions otherwise that's really what you're solving for from here not you know, rebase signing the balance sheet incrementally, right? I just want to make sure we're on the same page on this.
spk02: Yeah, that makes sense. If you remember, you know, our base plan, you know, probably had us growing FFO $150, $200 million a year. You know, we had our financing plan, which was really going to hold our debt levels somewhat flat or adjusted debt levels given where the pension's performing and, you know, our go-forward financing plan that included the billion dollars of equity. So to the extent that we face headwinds in Ohio, we'll be solving for that.
spk06: Right. Yep, absolutely. It's the deferred prosecution, anything with Ohio or otherwise, and then ultimately your base equity as previously described. Correct. Excellent. All righty. Just actually quick clarification, FD Forward, I mean, just next steps on delineating that and just what jurisdictions, if you can speak to that at all. It may just be high-level corporate, but I'm just curious.
spk02: No, it's across the entire business. I mean, it's from our utility companies all the way to our corporate centers. You know, so they're in the process today of executing on all the different initiatives that We are uploading all of that into our financial plan, and that'll be part of our go-forward plan in the fourth quarter, assuming that we get some of these things resolved. Excellent. All right. I appreciate it. Best of luck.
spk15: Thank you, Julian.
spk12: Thank you. Our next question comes from the line of Steve Fleischman with Wolf Research. Please proceed with your question.
spk07: Hi. Excuse me. Good morning. John, I just have to ask in that equation that you laid out about the, you know, issuing the equity in your plan relative to asset sales. I think you mentioned potentially selling assets or saying use like a 32 multiple. Is that the kind of range that there might be interest in some of these assets?
spk02: Well, I think we have, you know, real experience in that. I think Puget just got 32 times on their transaction. Duke got 28 times. You know, Centerpoint got 38 times. So, I mean, it's in the range of what we've seen in the industry.
spk07: Got it. And then, whatever you end up selling, can you just confirm kind of on taxes given I think your tax situation is it likely that there would be shields against any gains on a potential sale?
spk02: I would tell you we're working through that. We would like to structure it in a tax efficient manner but to the extent that we can't And we do have $7 billion of NOLs that we could utilize. So still TBD on that, but, you know, something that we're working through.
spk07: Okay. So I guess I meant totally whether it's the transaction itself or the NOLs between the two. Should there be limited taxes on potential sales, whatever they are?
spk02: Yes, that's correct.
spk07: Yes.
spk02: Okay.
spk07: Okay. And I guess one more question just on the asset sale aspect. So, in the DPA, there's a provision on the DPA kind of, I guess, tracking with any assets that are sold or obviously any change in corporate structure. Does that impact your asset sale process at all?
spk02: Steve, no, it doesn't. But I'm going to ask Hyun to maybe comment on that provision in the DPA.
spk13: Yeah, Steve, this is Hyun Park, the CLO here at First Energy. So there is a provision on mergers and changing corporate form and, you know, transactions of that nature. We don't think that, you know, a minority interest in the sale of a subsidiary would trigger a provision like that. We would probably, you know, speak with the assistant U.S. attorneys just to make sure that we're on the same page. But the transactions that are contemplated there, I don't think would be triggered by something like this.
spk07: Okay, I'll leave my questions there. Thanks so much. Thanks, Steve.
spk12: Thank you. Our next question comes from the line of Durgish Chopra with Ivercore ISI. Please proceed with your question.
spk08: Hey, good morning, team. Thank you for taking my questions. Maybe just on the asset sale process, looks like you're in advanced stages. Maybe could you just highlight for us what kind of interest are you seeing? What are you having these discussions with? Are these strategic buyers, EPA utilities, or sort of private entities? Any color that you could share there, please?
spk02: Thank you. It's probably a little too early to get into that level of detail. You know, I would just tell you that the transactions that we've seen in our space have had solid valuations, which tells me there is a lot of interest in regulated assets, and so Um, my expectation is there's going to be a lot of interest in anything we do.
spk08: Understood. Thank you. And then just to clarify your Ohio discussions, right? There are a few issues there, uh, the investigation and obviously the seat and, and, uh, amongst other things. So I guess in these sort of the, the collaborative discussions, you're, you're sort of discussing all of those issues. Is that sort of a fair assessment? Um, on how we should think about things getting resolved here going forward?
spk10: I would like to think about all those issues being under one umbrella. Our first meeting that we had in March, we were very careful to go in and listen to concerns, listen and get input on different things that could be done in Ohio for the benefit of customers. So, yes, I would like to put all of this under one umbrella once we reengage the collaborative. And now that the DPA is behind us, I think we really do have a very good opportunity to not only listen, but then start to proceed to some level of action. It would be my greatest hope.
spk08: I appreciate that, Steve. And then maybe just for us and for investors, are there sort of some milestones or timeline from this point on as these discussions evolve to watch for?
spk10: I want the process to unfold with the next meeting, and I want to respect that process. So my hope would be to make significant progress by the end of the year, but I do want to respect the process and not just simply mandate something.
spk08: Understood. Totally understand. Thank you, Steve, for taking my questions. And John. Sure. Thank you.
spk12: Thank you. Our next question comes from the line of Sophie Karp with KeyBank Capital Markets. Please proceed with your question.
spk11: Hi, good morning. Thank you for taking my question. Good morning. I'm curious to hear your perspective on maybe a little bit more longer-term view. Once you put the initial equity needs behind you with potentially the sale of a stake in a business, like you described, is 12% to 13% of the total debt still a suitable long-term target, or would you be inclined to maybe increase that and to equitize your balance sheet a little more? Just maybe a little bit of that.
spk02: Well, Sophie, I think, you know, we've talked about 12% to 13% no later than 2024. I think we would want to improve from there. over time, knowing that in our current business plan, probably 65% of our CapEx is formula rate spend, which provides incremental FFO each and every year. So, you know, I would like to get to a spot where we're 12 to 13% and improving over the long term.
spk11: Got it. Thank you. And then a follow-up, if I may. So you mentioned that once you have more definitive view on the potential transaction here, you would be in a position to provide a long-term outlook. And so just to make sure, we're talking about the fourth quarter of 2021. Are you saying that you would be able to incorporate some views about your 2024 rate case in Ohio when you do that and assumptions about that proceeding sort of in your long-term outlook? at that time?
spk02: So I think the rate case in 2024 will probably be something that is dealt with as part of the collaborative discussion with all the parties down in Columbus. So to the extent that we can have clarity around that, then we'll obviously provide that in the fourth quarter if that were the time frame. So I would tell you that we are open to those types of recommendations. If the parties thought that we needed to come in to file a case sooner than that, I think we would be open to that. And so it's something that we'll be discussing, I'm assuming, over the course of the next few months.
spk11: Thank you.
spk12: Thank you. Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.
spk15: Good morning. How are you? Good morning, Paul. So I guess it's sort of a big-picture question. You know, I don't need to tell you guys that obviously politics and money go together. It's a very political business. And I understand the reforms you guys are doing and everything. But I guess one of the thoughts or concerns that might come up is, And how do you sort of, Steve, how do you spread the needle here? Because on the one hand, obviously it makes sense for you guys to obviously institute reforms and everything. On the other hand, it's important, right, for almost all utilities to be heavily involved in the political process in the jurisdictions you guys operate in. Do you follow me? I mean, are you guys concerned? There's always the potential of sort of an overreaction, if you follow what I'm saying, and And I'm looking at the actions and they seem very aggressive and understandably so to a certain degree. But how do you sort of thread the needle? Do you follow what I'm saying? Or are you guys at all concerned about that? Or how should we as investors think about that sort of as the years play out here about how much you guys might not be engaged as much as perhaps might be desirable? Do you follow what I'm saying?
spk10: Yeah. I appreciate your question. I think right now the best thing that we could do is what we have done, and that is to hit the pause button, review and then appropriately revise our approach to everything from lobbying and the use of consultants and just take this one step at a time and thread the needle appropriately. As I've stated before, that future vision is going to be much more limited than what it has been in our past because we are moving in a very clearly different direction with integrity and trust at the center of it. The other thing that I think you can count on is robust disclosures that we've committed to as part of the DPA and in other arenas. But look, I do understand the need to be in the arena, and we will be in it, but we're going to be in it on those issues that matter to our customers and to our company. And we're going to do that in a much more limited basis. So I appreciate everybody's patience around the pause button that we hit here, but we're going to continue to just flat out do the right thing and constructing the right policy internally before we step back into the arena is the right thing to do.
spk15: Okay. And then just in terms of, and I wasn't clear on this, I think it was Ashar's question with respect to the potential for a rate case proceeding in Ohio. If I just clarify, were you guys basically saying that sort of up in the air until you guys get more clarity? Is this too early to say what what might actually be sort of the fallout, so to speak, on the PUCO disclosures and the DPA and everything else, how that might proceed, or is there any more clarity, I guess, you have on that? I just want to make sure I understand that.
spk02: Yeah, Paul, so it's too early to say, but my point was we would be open to it if that's what the parties suggested. So as part of our collaborative discussions with the other parties, If there was a sense that we needed to file a case before May of 24, we would be open to that.
spk15: Okay. Thanks so much for the other questions that have been asked. Thanks so much. Have a great one. Thank you.
spk12: Thank you. Ladies and gentlemen, our final question today comes from the line of Andrew Wiesel with Scotiabank. Please proceed with your question.
spk14: Thank you. Good morning, guys, and congrats on the DPA. It's certainly a big milestone. A lot covered in the column. We're up on the hour, so I'll keep it short. But two things I just wanted to clarify. First, on the last call, you indicated that the internal investigation hadn't identified any new issues, and it sounded like minimal cause for concern outside of Ohio. With the dissolution of the Independent Review Committee, does that mean that it's basically, is the review done at this point? Is it safe to say that there's no other causes for concern beyond what's been revealed so far?
spk10: Well, I think in John Summerhalter's comments, he had stated that, look, we have moved to dissolve that committee. And really, we will maintain kind of a reactive or responsive type capability and coordinate that with the SLC for any inbound additional issue. But by the dissolution of the committee itself, I think it really does represent that it's at its conclusion.
spk14: Okay, great. Then as far as O&M costs, I know FE Forward, they're very impressive numbers you've put out on the cash flow and CapEx efficiencies. Remind me, do O&Ms also fall under FE Forward? And maybe more broadly, can you give your latest thinking on the outlook for operating expenses particularly with so much learned about operations during the pandemic and finding some of the more permanent improvements and processes?
spk02: Yeah, so, Andrew, I think as part of the FE Forward process, you know, the goal would be to absorb any inflationary increases for the foreseeable future. So right now we spend about $1.2 billion on what I'll call our base O&M program between corporate and our utility group. And we would expect to hold that flat over the foreseeable future through different efficiencies and transformational efforts that we identify through FE Forward.
spk14: Okay, great. Thank you so much.
spk12: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Stroth for any final comments.
spk10: Thank you very much, and thanks for everyone being here with us today. As we described today, we continue to make solid progress to transform First Energy to deliver the long-term value that our shareholders, our employees, and all stakeholders seek. So we will talk to you again very soon, and please be well and be safe. Thank you.
spk12: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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