FirstEnergy Corp.

Greetings and welcome to the First Energy Corp's second quarter 2022 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 host, Irene Brezel, Vice President of Investor Relations for First Energy Corp. Thank you, Ms. Brezel. You may begin.

Thank you. Welcome to our second quarter earnings call. Today we will make various forward-looking statements regarding revenue, 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 to 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 filings. 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 and year can be found in the Strategic and Financial Highlights document on the Investor section of our website. We'll begin today's call with presentations from Steve Straw, our President and Chief Executive Officer, and John Taylor, our Senior Vice President and Chief Financial Officer. Several other executives will be available for the Q&A session. Now I'll turn the call over to Steve.

Thank you, Irene, and good morning, everyone. I'm glad you could join us today. Yesterday, we reported second quarter gap earnings of 33 cents per share and operating earnings of 53 cents per share at the upper end of our guidance range. Today, we are reaffirming our 2022 operating earnings guidance of $2.30 to $2.50 per share. We are also affirming our long-term annual operating earnings growth rate of 6% to 8% and accelerating our FFO to debt target of 13% by one year to 2023 from 2024 with targeted metrics in the mid-teens thereafter. As John will discuss later, given our strong year-to-date performance, we have begun strategically investing in maintenance activities in our distribution businesses to further improve reliability and get ahead of future planned work. This provides tremendous flexibility in our long-term plan. We will continue to accelerate these operating expenses during the second half based on the strong outlook for the remainder of the year. Through the first half of 2022, we've made significant progress to strengthen our culture, optimize our operations, bolster our financial position, and support the grid of the future, continuing our momentum to become a more customer-focused and sustainable utility. Across the company, we're continuing to amplify our core values of safety, integrity, diversity, equity, and inclusion, performance excellence, and stewardship. We've recently launched a new employee communication campaign to focus on each of these values and how they drive our success. In addition, I've personally connected with thousands of employees over the past several months to discuss our core values and to hear directly from them on what we can do to get better as a company. Since March, I've held about 50 virtual and in-person listening sessions with more than 4,000 employees across First Energy. We've had a lot of great engagement during these sessions, And it's been incredibly valuable for me to interact with employees and get their feedback. I'm very proud of how our employees are executing on our plan and of the company and the culture we're creating together. I'd also like to take a moment to welcome two new directors who were elected to the board at our annual meeting in May. Sean Klimczak of Blackstone and Janet Kroom of Kimball Electronics. In related developments, John Sommerhalder was elected board chair and no longer serves as an executive of the company. And Lisa Winston-Hicks was elected lead independent director. I welcome the guidance, leadership, and support from our refreshed board. Now let's turn to some key accomplishments in the quarter. First, in May, we completed the sale of the 19.9 minority stake in First Energy Transmission LLC to Brookfield for approximately $2.4 billion. The proceeds from this historic transaction, together with the billion dollar Blackstone equity investment that closed in December, have been deployed to strengthen our balance sheet and fund our regulated capital investments. And as John will discuss in more detail later, By paying down over $2.5 billion in long-term debt this year, we are driving meaningful progress and are ahead of our original plan to improve the credit profile of the company. Our transmission business continues to be one of the focal points of our strategy. Our Energizing the Future program has a relentless focus on reliability improvements for our customers. We began the investment program in the AFSI region in 2014, and since that time we have seen a 53% reduction in interruptions to customers caused by transmission outages, a 49% decrease in transmission line outages, and an 88% improvement of our protection systems. We're striving to build on this success within ATSI and across our territory as we continue to expand this investment program. So far this year, we've completed important work across our footprint to reconfigure several substations, rebuild transmission lines, replace transformers, and enhance network, cyber, and physical security. These projects improve operational flexibility, upgrade the condition of equipment, and enhance system performance. Our goals for the transmission business are aggressive, yet achievable, and we have the right strategies in place to ensure our success. We're also making continued progress to advance our customer-focused sustainable growth strategies on the distribution side of our business. In Ohio, earlier this month, We filed for the second phase of our grid modernization program, which builds off the system upgrades we've completed in the state since the PUCO approved our GridMod 1 program in 2019. The new four-year GridMod 2 plan proposes a $626 million capital investment to expand our deployment of GridMod technologies designed to enhance the delivery of safe, reliable power, promote modern experiences for customers, offering emerging technologies, and provide opportunities to help lower customer bills. The second phase of our GridMod program includes installing automated equipment on nearly 240 distribution circuits that can isolate problems, minimize the number of customers impacted by an outage, and quickly restore electric service. Energy saving voltage regulating equipment on nearly 220 circuits that can reduce the amount of energy that must be generated and more evenly distribute electricity down a power line. And an additional 700,000 smart meters along with the supporting communications infrastructure and data management systems. In addition, the filing includes several pilot programs expected to provide enhanced customer benefits. These include supporting the adoption of EVs across our Ohio service territory by offering incentives to residential and commercial customers who participate in utility-managed charging of their electric vehicles. and installing a battery storage system along the Ohio Turnpike that's designed to support increased EV charging load and enhance grid reliability. In the aggregate, we estimate the benefits to our Ohio customers of enhanced reliability, energy efficiency opportunities, and the innovative products and services to exceed the costs of the GridMod2 program by nearly $280 million in today's dollars. Moving to West Virginia, in April, the Public Service Commission provided conditional approval of our requested tariff to build a total of 50 megawatts of utility-scale solar generation in the state at a cost of approximately $100 million. In their order, the PSC required our Manpower and Potomac Edison subsidiaries to subscribe at least 85% of the output before beginning construction on these facilities. We began accepting commitments from residential, commercial, and industrial customers to purchase solar recs in May. We're making progress to meet the 85% threshold And at that time, Monpower and Potomac Edison will seek final approval from the Commission for a surcharge to cover the balance of the project costs and begin full-scale construction. We expect the first solar generation site to be in service by the end of 2023, with the construction completed at the four other sites no later than the end of 2025. Finally, in New Jersey, JCP&L reached a settlement on our electric vehicle program with BPU staff, New Jersey Rate Council, and others, which was approved by the BPU without modifications in June. Our four-year, $40 million EV-driven program is designed to accelerate the adoption of light duty electric vehicles with incentives and rate structures that continue to support the development of EV charging infrastructure throughout our JCP&L service territory. The cost of the program will be deferred into a regulatory asset. Capital costs will earn a return of 9.6% with recovery of those costs determined in JCP&L's next base rate case. Before I pass the call over to John, we recognize there's significant interest in our pension plan performance in light of rising interest rates and the current bear market. We're committed to being transparent and flexible on this issue, and we'll keep you informed on our expectations and our plan as the year progresses. In addition to the details John will provide on today's call, we've also published two new slides on this topic, in our highlights document. I'm very pleased with our progress throughout the first half of this year. We remain committed to continuing our transformation and becoming an industry-leading utility that provides value to our investors, customers, employees, and communities. Now I'll turn the call over to John.

Thanks, Steve, and good morning, everyone. Thanks for being here. I'll start with some additional perspective on the pension Then we'll move into a discussion of our earnings and other financial matters. To put this all in context, the impact of the pandemic, the war in Ukraine, and other macroeconomic factors has resulted in extreme inflation and market volatility that we haven't seen in over 40 years. And so we recognize that this is a topic that has a lot of attention today, but we don't consider this an issue that impacts the long-term value proposition of the companies. Through the first half of this year, interest rates have increased significantly, with the discount rate that measures our pension obligation increasing from 3% at the end of 2021 to approximately 4.8% as of the end of June. Likewise, equity markets across the globe are down significantly, with asset performance in our pension trust down approximately 15% through June. Although this results in an estimated earnings headwind of approximately 30 cents per share beginning in 2023, which reduces the non-cash benefit from the pension from 40 cents per share in 2022 to an estimated 10 cents per share in 2023, the funded status of our qualified pension plan has improved from 82% at the end of 2021 to 84% at the end of June. Although we believe the earnings impact associated with a pension will normalize over time, we recognize that the historic market environment presents a challenge in the near term from an earnings perspective. And so let me take a minute to address this. First, our regulated strategy and capital investment program continues to be strong as we transition more of our capital investments to formula rates with real-time returns while working to lower our base operating expenses. Our base plan includes formula rate investments of approximately $2.4 billion in 2023 and $2.6 billion in 2024 that earn solid returns. In addition, as Steve mentioned, the outlook for 2022 is very strong given the successful tender offer completed in June at our holding company and higher than anticipated income from legacy commodity-based investments. And our FE Forward program continues to be part of our plan. allowing us to optimize our cost structure and be more strategic with our operating costs. In combination, these items allow us to accelerate future plan maintenance work into 2022 that will provide flexibility with operating expenses in future years while meeting our financial commitments for this year. We've also identified a number of other steps to address the pension headwind. These include accelerating additional capital investments and optimizing our financing plans which includes moving $1 billion of planned debt financings from 2023 to future years, reducing corporate costs in our real estate footprint, as well as anticipated benefits from continued improvements we are seeing in customer arrears. From a regulatory perspective, we are exploring proposed changes to rate treatment for our pension to moderate impacts of market volatility between rate cases, but this will take some time and will likely be executed as we file base rate cases in each jurisdiction over the next few years. And so I'll conclude the pension discussion to say this. We realize this is complicated and recognize the potential near-term earnings impact to the company. But we do believe there is a clear silver lining. As markets became volatile and interest rates increased, we were able to take advantage of the situation by retiring high coupon debt in amounts well above our original plan. At the same time, rising interest rates reduced our pension liability by $550 million. And as a result, as Steve mentioned earlier, we've made significant progress through the first half of this year to improve our balance sheet and strengthen the credit profile of First Energy. Utilizing the proceeds from the Brookfield and Blackstone transactions, we eliminated approximately $2.4 billion of Holdco debt in the first six months of the year, which equates to $125 million in saved interest costs on an annual basis. This includes the early retirement of an $850 million FECorp note in January, a $500 million FECorp note in June, and the repurchase of $1 billion in high-coupon FEC notes through our successful tender offer last month. This surpasses our original plan for holding company debt reduction and brings First Energy Holdco debt as a percentage of total debt to 26% from 33% at the end of 2021. And based on our current forecast with these enhancements, we are tracking just under 12% FFO to debt in 2022 and plan to be at 13% FFO to debt in 2023, a year ahead of what we initially targeted. Last week, Fitch upgraded First Energy and FET to investment grade and upgraded our utilities to a BBB flat rating, reflecting the successful completion of our equity transactions use of those proceeds to pay down company debt, and the expected strengthening of our credit metrics, our settlement to address key Ohio regulatory issues, and our meaningful improvements on governance matters. We are proud of the progress we've made, and as we saw with the FET transaction, premium valuations of our businesses in the private sector give us significant optionality to further improve the balance sheet and increase value for shareholders. And now let's turn to a discussion of our financial performance for the quarter. Second quarter gap earnings were 33 cents per share and operating earnings were 53 cents per share and within the upper end of our earnings guidance range. The 20 cents of special items in the quarter include a charge of 17 cents per share associated with the redemption and early retirement of FE corp notes that we discussed earlier. On a pro forma basis, excluding the impact of accounting changes, rate credits provided to Ohio customers, and equity financing transactions, operating earnings increased by $0.06 per share, or 13% compared to the second quarter of 2021. On a year-to-date basis, we reported gap earnings of $0.83 per share and operating earnings of $1.12 per share. Adjusting for the impacts of accounting policy changes, Ohio rate credits, and dilution, this represents a six cent improvement versus our operating earnings for the first half of 2021, or approximately 6% year-over-year growth. Results for the quarter in our distribution business decreased slightly compared to the second quarter of 2021, but remain consistent with our expectations. The positive impact of our investment programs in Pennsylvania, Ohio, and New Jersey was offset by slightly lower residential customer demand, as I'll discuss in a moment, and higher planned operating expenses, including planned maintenance outages at our generation facilities, as well as the impact of accelerated maintenance work we mentioned earlier. I do want to note, despite the inflationary conditions, our year-to-date base O&M expenses are consistent with our operating plan, reflecting strong financial discipline. Total and weather-adjusted distribution deliveries increased approximately 1% compared to the second quarter of 2021 as a result of stronger demand from commercial and industrial customers, reflecting improving conditions versus last year. Residential sales decreased 1.6% on a year-over-year basis due primarily to milder weather compared to the second quarter of 2021. On a weather-adjusted basis, residential usage decreased slightly due to a continued shift to more normal work and social activities, albeit sales in this class continue to be elevated as compared to pre-pandemic levels. Deliveries to commercial customers increased 1.5% or 1.9% on a weather-adjusted basis, and sales to industrial customers increased 2.4% versus last year. And for the first time, industrial sales were higher than pre-pandemic levels by close to 1%, reflecting strong recovery and growth in many sectors, including steel, fabricated metals, automotive, and food manufacturing. In our transmission business, second quarter results benefited from strong rate-based growth associated with our ongoing investments in the Energizing the Future program to improve reliability for our customers. We currently have more than a thousand transmission projects underway across our footprint. and we've been successful working through acute supply chain challenges to remain on track with our plan to invest $1.5 billion in our system this year. And finally, in our corporate segment, our results improved by 9 cents per share compared to the second quarter of 2021, largely impacted by higher profits from our legacy investment in a mining operation in Montana, as well as lower interest costs from our efforts around the balance sheet I mentioned earlier. The legacy investment is from the late 2000s, where we are a minority investor with a 33% share in the facility. Historically, it has not been a significant driver of our results. However, given higher commodity prices, the mine is outperforming our expectations for 2022 with both earnings and cash distributions, which, as I mentioned before, provides us significant flexibility to accelerate reliability and maintenance work in our distribution business. Although earnings from this investment may continue into future years, our original plan did not include any earnings contribution beyond 2022. We're off to a solid start for the first half of the year with a strong outlook for the second half. As Steve mentioned, we are confirming our 2022 operating earnings guidance range of $2.30 to $2.50 per share and are also providing third quarter earnings guidance of $0.70 to $0.80 per share. While we're disappointed in our relative stock price performance since our first quarter call, given the progress we have made over the last two years on many fronts, we're confident that our superior assets and clear strategy place us on strong footing to perform well in the future. With that, we'll go ahead and open the line for your questions. As always, thank you for your time and your interest in First Energy.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. If you would like to remove yourself from the queue, please press star 2.

One moment, please, while we poll for your questions. Our first questions come from the line of Shar Perez with Guggenheim Partners.

Please proceed with your questions.

Hey, guys.

Morning, Shar.

So, no surprise, I'm going to start with a pension question here, if I may. I guess, what sort of proposed changes to rate treatment would you be exploring for your pension to sort of moderate the volatility in between cases? What could that look like? I mean, have you started any dialogues with the commissions on this ahead of the filings? And then just as a follow-up, would you consider moving away from sort of that MTM accounting and towards maybe the smoothing of actual gains and losses like some of your peers do, whether that's the corridor method or some other approach? Thanks.

Hey, Char, this is John. So I think we've had some internal discussions about this. We have not talked to any of the regulatory commissions about this, but it is something that we're looking at and we're trying to figure out mechanisms that can protect the company from the volatility that we're seeing today. And so nothing necessarily set in stone, but looking for like tracking mechanisms or some type of deferral mechanism that could protect the utilities from the volatility that we're seeing. And then to your second question, and when we adopted the, uh, the mark to market accounting, I think back in the, uh, in the 2010, 11 timeframe, um, that was a preferred method of accounting. And so we can't go back to another method.

Got it. Okay. That's helpful. Thank you for that. And then just lastly, um, I know obviously you, you reiterated the six to eight, um, growth rate and, We clearly see the strategy you guys have laid out to try and mitigate the pension-driven headwinds, but 30 cents drag is still somewhat material in the near term. Just all else equal, if the 30 cents ends up being the final number, I guess where would that kind of put you in terms of that six to eight, at least at the front end, knowing some of these mitigation measures you could be deploying? Thanks.

Sure. Before I turn it over to John for a couple comments, I just wanted to, on an overall basis, just acknowledge this is a very fluid situation for us. We have put a plan together that John outlined in his prepared remarks, and it's up to us to work it. We continue to be very clear and transparent in our disclosures and During the first quarter call, we were very upfront and straightforward about the challenge. We also have found a way to find a path forward. And we're going to continue to be very transparent on the issue. There are some things within our plan that are within our control, some outside of our control. As I said, it's fluid. And look, we're going to be committed to do what's reasonable to address the gap. But be careful that we're not going to unduly impact our customers' experience with us and get our company off track. So I just wanted to make those introductory comments before I turn it back over to John.

Yeah. And, Char, I'm not going to, you know, obviously commit to low-end or high-end of the 6% to 8%, but what I would tell you is this. It's a very volatile situation. In fact, if you just look through The month of July, given the broader markets are up, there's been some softening in the interest rates. The earnings headwind associated with the pension has improved. At the same time, our funded status has also improved. So it's a very volatile environment and something that we're staying close to. Let me maybe take a minute and talk about this in two ways. First, if you just look at year-over-year earnings growth, based on what we know relative to the pension. It starts with our regulatory strategy, strong formula rate investments across transmission and distribution, as well as the rate structures we have in place from the Ohio seat settlement that provides really strong regulatory earnings growth. Next year, you'll also start to see the full year of the interest savings from the whole code debt reduction initiatives, which is about 18 cents a share annually. That'll start to flow through beginning next year Obviously, that's going to be partially offset by new debt issuances, but it will be a benefit to year-over-year earnings. And then, as I mentioned, we have planned operating efficiencies from FE forward, as well as the benefits from the tender transaction and the investment earnings on the corporate side, the mining operation, where it's giving us flexibility to pull ahead some planned maintenance work this year from future years. And then the remainder of the issue will be addressed by, you know, optionality across a broad spectrum of initiatives, including increased capital investments on the transmission system, you know, permanent reductions in corporate and support costs, for instance, external branding and communication costs, as well as reducing our real estate footprint. And then, you know, we might even have uplift from the mining operation next year that we would consider that's not in our plan. So I say that because I think the most important way to maybe look at it is what's changed relative to our plan to deal with the 30 cent headwind. And I think you can kind of frame it this way. About 40% of the headwind will be addressed by the moves we're making now to move operating expenses around. 25% of the headwind will be addressed through changes in our financing plan. And then the remaining third will be associated with the reductions in corporate costs and new capital investments that I mentioned earlier.

That's extremely good color, John. That's very much appreciated. I want to appreciate it, guys. Thank you. Thanks, sir.

Thank you. Our next question has come from the line. It's Steve Fleischman with Wolf Research. Please proceed with your questions.

Yeah, thank you. Can you hear me okay, Steve? Yes, we got you. Good morning. Oh, great. Thanks. So just to kind of follow up to the answer to that last question, John, you gave the buckets of kind of the offsets, but it kind of implied that those offsets might be enough to agree that 30 cents is the right number, because I know that number won't be set in stone, to offset at least maybe most of that. Is that correct, or...

Is that? Yeah, that's correct. I mean, the items that we have in place around, you know, increasing our capital investments, permanent reductions in corporate and support costs, customer arrears, the improvement in uncollectible expense that we're seeing, you know, we feel very comfortable based on what we know right now, as well as the changes in the financing plan. You know, everything that I mentioned earlier, we feel good about the 30 cents.

Okay. And then obviously you'll flex these if that $0.30 becomes smaller by year end. Maybe you don't do as much. Correct. But you're kind of finding ways to manage this issue so far. Okay. Good. And then second question is to comment on the value of private market values relative to public market. Could you maybe give a little more color on why you kind of highlighted that in the slide deck and what you might be thinking there?

Steve, this is Steve. And it's really all around just considering the given success that we had with the FET transaction. And we're just going to continue to examine ways of creating shareholder value if it makes sense. You know, step one is to understand potential value. And it's something that we look at on very much a routine basis. And we do have the opportunity to create some new optionality, we believe, based on valuations and where those valuations are right now. And it's just part of our ongoing planning process.

Yeah, Steve, I would just add on to that that we continually look at various options to create value, and if there are ways to be opportunistic to take advantage of the difference between public valuations and private market valuations, we're going to consider that. And I would tell you that utility asset valuations in the private sector continue to be strong.

Okay. And then That's helpful. And then my last question is just on the FFO to debt improvement kind of happening sooner. Could you talk to whether that has any kind of implications on the timing of, you mentioned the Fitch going to investment grade, maybe the other agencies, and also the timing of when you might consider growing the dividend again?

Yeah, so maybe I'll take the discussion with the rating agencies. We've provided them our new plan, which reflects the tender transaction, the changes that we've made in our financing plan, as well as the mitigating actions that we're going to take to offset the pension. And it clearly shows that we're going to get to 13%. next year as we execute. But I'm not going to speak for the rating agencies. It's up to us to execute against our plan. Moody's has us on positive outlook, but as we talked about with them, it's really important for us to execute against that plan to ensure that they feel comfortable with moving to an upgrade. And then on the dividend, yeah, I mean, obviously we're focused on on dividend growth. I mean, we realize that it's been flat for a couple, three years now. And so as earnings start to grow, we will continue to consider dividend growth.

Okay. Thank you. Thanks, Steve.

Thank you. Thank you. Our next question has come from the line of Nicholas Campanella with Credit Suisse. Please proceed with your questions.

Hey, thanks for taking the question. I appreciate it. I just wanted to ask again on the public versus private comments. You do have kind of a track record for doing this already at the FEP level. So just curious if this is something similar to that transaction that you're exploring. Is this kind of like another entire portfolio review? Can you give us more details, please?

Yeah, Nick. So we look at different options each and every year. Just look at all the assets that we have. We're not necessarily targeting a set of assets at this point in time, but it is something that we take a look at from time to time. And if there's, like I said, options to create value for shareholders that takes advantage of these high private valuations, then we're going to consider that.

Got it. Thanks a lot. And then just back on the pension efforts here, you know, you kind of mentioned, you know, working to kind of smooth these at the regulatory level. Just what states kind of have the most meaningful impact for like an ultimate offset? And, you know, is it really just like Ohio and then it would be, you know, a 2024 Ohio rate review item to watch? Or maybe you can give us more clarity there.

Well, I mean, I think you could probably – You know, based on the number of customers we serve and the size of the states, our service territory in those states, it probably mirrors that pretty good. So I don't have to break out by state, but we've been able to do some things in certain states, New Jersey, West Virginia, Maryland. you know, where we've had recent rate cases and we were able to get some different treatment there. Ohio and Pennsylvania, it's been more traditional. You know, in Ohio we recover service cost only. Pennsylvania is based on cash contributions to the pension trust. So the exposure probably you can just kind of pro-rater it based on the number of customers each of those utilities has or each of those states have. But, you know, what we're really looking to do is try to protect the company from the volatility that we're seeing, for instance, this year.

All right. Thank you.

Thank you.

Thank you. Our next question has come from the line of Michael Lapidus with Goldman Sachs. Please proceed with your questions.

Hey, guys. Thank you for taking my questions. A couple of ones. First of all, I noticed in the back of the slide deck you did not change your capital spend forecast. Some of the commentary you make about pulling forward spend, is what you're saying you'll pull forward O&M into 2022, or are you talking about pulling forward capital or both?

Right now, Michael, our plan calls for the pulling forward of O&M primarily.

Okay. The other question is your regulatory sections still highlight plans to file rate cases everywhere next year except Ohio and Ohio in 2024. Are you filing those cases to fix rate design or are you filing those cases because you think you're under-earning in all three of those states?

Well, I think if you look at the ROE that we published for New Jersey, West Virginia, and Maryland, they're all sub-8%, you know, as of Q2 LTM. So I would tell you that I feel like we're not, you know, earning a reasonable return at this point in time. So I think there's nothing that I'm aware of that gets to rate structure or rate design at this point. I mean, obviously we have a little bit of time to plan and prepare for that, but this is mostly to, you know, earn a reasonable return on our investments.

Got it. And can you remind me which of those states have forward-looking test years and which of those are more on a historical test year? And is there anything you can do to fix the ones or improve the rate-making design for the ones that are on historical?

Yeah.

So West Virginia and Maryland, I think, are historical test years. So we'll likely use 2022 as the test year. I think New Jersey is a little bit of a hybrid where you use some historical, but you can project for certain things and project into the future. So I don't think there's a lot that we can do to change that in those states, but that's kind of where we are at this point.

And in Pennsylvania, are you under-earning even though you're utilizing the disk, or do you not have the disk turned off?

We have the disc turned on. All of our operating companies have the disc turned on. So at least according to what we published, we're earning about 8.1% on a pro forma basis, which includes the full year of accounting changes that haven't flowed through the actual results yet but will over time.

Got it. Thank you, John. Thanks, guys. Much appreciated.

Thank you, Michael.

Thank you. Our next question has come from the line of Jeremy Toney with J.P. Morgan. Please proceed with your questions.

Hi. Good morning.

Good morning.

Just wanted to come back to the pension situation real quickly, if I could, just to put a bow on it all. It sounds like you guys believe you have all the tools needed to fully offset the 30-cent headwind as it stands right now. Is that a fair way to think about it?

Yeah, based on what we know today, Jeremy, we've identified everything we need to offset the 30 cent headwind. I would just remind you just to, you know, it's going to be fluid, right? And so that's going to change from time to time. And we're just going to have to keep a close eye on it. And we'll be transparent with you on exactly where we are. But based on what we know as of this point in time, we feel like we can address the 30 cent headwind.

That's very helpful. Thank you for that. And then just wanted to circle back to the management review process. I could just wondering timeline to conclusion there when we'd hear more, do we need resolution of all actions in federal court or just wondering what, what's the gating items to complete at this point?

Jeremy, as we previously disclosed, there was a management review committee created as part of our board of directors, and the work is underway. So that sets off a 90-day clock to complete the review, and I would say I would be thinking around mid-September by the time it's completed, and The board's following their process, and I really can't comment beyond that.

Got it. I'll leave it there. Thank you.

Okay. Thank you.

Thank you. Our next question has come from the line of Julianne Jemelin-Smith with the Bank of America. Please proceed with your questions. Hey, guys.

Sorry, a couple of clarifications here. Just to confirm, are you still guiding to the approximately 255 to 260 For 23, right? And I know you say things are fluid, but the 23 number specifically here.

That's right.

Got it. And when you say things are fluid, obviously pension market is fluid. Are the offsets fluid? And just if you can repeat, what elements are fluid? I mean, I'd be curious. I mean, how do you think about the coal contribution, PRB prices seem to be abating here? Also, I suppose the Pennsylvania tax rate moving around. Is that kind of more of a structural uplift here? If you could talk to the offsets of being fluid and then some of the components there, those two.

There is some ability to be flexible with some of the offsets in terms of how we accelerate expenses from future years into this year, the level of increased transmission spend that we want to put in place. The mining operation is somewhat fluid. So there is some fluidness to all of this. My point on the pension was mostly around, we know 30 cents today has gotten a little bit better as of last Friday, but the markets are volatile, right? And the 30 cents could be lower, it could be higher, and so we're just going to have to keep an eye on it. But based on what we know today, we feel pretty good about where we are.

Right, and so maybe just to clarify the fluidity of this, because pension is fluid, you're moving costs around. How structural is that $0.30 offset, though? Maybe that's the other side of this stuff. I get that the Pennsylvania tax rate benefit could be structural, or at least until the next rate case, but what other dynamics here, if you can think about that?

So just real quickly, because you mentioned it twice now, The Pennsylvania tax rate, that's not structural. That's going to flow back to customers. So that won't be an earnings impact to us going forward. But a lot of the things that we're doing around corporate and support costs, reducing our real estate footprint, that is structural changes that we're going to make. The improvement in customer arrears and being able to reduce uncollectible expense, that could be structural. you know, the level of contribution from the mining operation, that's probably fluid, right? Because a lot of it depends on commodity prices and the ability for the mine to execute against their plant. So there's a lot of moving pieces here. All right.

Excellent. Well, thank you. I'll leave it there. Appreciate it.

Thank you, Julian.

Thank you. Our next question has come from the line of David Arcaro with Morgan Stanley. Please proceed with your questions.

Hi, thanks for taking my question. I was wondering if you could talk a little bit about the load growth that you're seeing, pretty good growth this quarter, and I'm wondering if there are any pockets of weakness or recession risks that you see coming up, particularly around the industrial sales, or how things are shaping up from there.

Yes, so David, I would tell you that We're seeing pretty good growth in the industrial sector quarter over quarter. I mean, if you look at the last three or four quarters, on average, it's grown anywhere from 2% to 3%. And that's what we're seeing in the second quarter. I would tell you on the industrial side, the trends in many of the sectors are better than what we saw in the first quarter. For instance, steel was up 10%. quarter over quarter versus 4% in Q1. Auto was up 7% versus 4% in Q1. So we're seeing a lot of trends move in the right direction, which we feel good about. And in fact, as we mentioned on the prepared remarks, this is the first quarter we've seen since the pandemic that our industrial load was better than what we saw in 2019. And that was across a lot of different industries.

Got it. Thanks for that caller. And just one clarifying question on the pension. You had mentioned the 40 cent kind of benefit goes down to a 10 cent non-cash benefit. I was wondering if you, how do you look at that 10 cent pension benefit? Is that kind of transitory and goes away over time? I know it's going to fluctuate obviously in the, in the near term with, with with the pension and with the markets, but is the 10 cent, kind of sensitive to rate cases going forward, does it get passed along?

Thanks. So each jurisdiction has different rate treatments, you know, for customers. And so, you know, in the states that we file, we'll file in next year, we'll use 22 as a test year. it'll be at that $0.40 level. And so they won't see the change to the $0.10 a share next year.

Okay, understood. Thanks so much.

Thank you. Our next question has come from the line of Greg Orrell with UBS. Please proceed with your questions.

Yeah, thank you. Just to follow up on the O&M pull forward, just sort of if you could address how you've thought about supply chain challenges and inflation and labor issues. Do you have the labor you need?

Yeah, Greg, I would say a lot of the work we've already started to execute on, and so We have the contractors and the labor to support that. You know, that's not to say that we don't have, you know, challenges with supply chain. You know, we're seeing, you know, a lot of different impacts specifically around lead times, around equipment across a number of categories. Transformers, breakers, regulators all have extended lead times, but This is more around just getting planned maintenance work done ahead of schedule and in 22 as opposed to future years. So it's not necessarily a contract or a labor issue. All right. Thanks. Thanks, Greg.

Thank you. Thank you. Our next question has come from the line of with Barclays. Please proceed with your questions.

Hi, good morning, guys. Thanks for taking my question. So, you know, obviously, congratulations on the Fitch upgrade. You know, for the other rating agencies, any specific catalysts you think they're waiting for? You know, I think Moody's mentioned a sort of a board level management review is one. And to clarify, just the FFO to debt number you're giving, 13%, does that add back pensions?

Well, they'll use the pension. obligation at the end of 21. That's in their metrics, which supports the 13% that we provided them. That's correct. But with respect to Catalyst, I'm not aware of anything specifically that either Moody's or S&P are looking for. I think it's just continued execution against our plan and seeing how the cultural changes continue to progress. The changes around compliance and ethics that we're executing on, all the recommendations that came out of the investigation and how we're executing on those will be important as well. But nothing specifically that they've said, you know, is a catalyst for the upgrade that I'm aware of.

Thank you. And just in terms of the use of proceeds from the various transactions, I think the total was around $3.5 billion, so both the FET minority stake sale and the new equity as well. You did mention $2.5 billion, of course, gone to whole code debt reduction. How are you thinking about the remaining $1 billion?

It'll be deployed at the operating company level to strengthen capital structures to fund their capital programs. So that's the plan.

Got it. And should we think of that as sort of accelerated debt repayment in any of those OPCOs, or does it more just sort of reduce upcoming debt issuance needs there?

Yeah, the latter, upcoming debt issuances.

Got it. And then just one final one. You mentioned the potential for future asset sales or minority stake sales. How are you thinking about that in terms of what would drive the use of proceeds there?

Well, I would tell you, you know, given where some of our high-coupon debt is trading today, I mean, it's very attractive to maybe continue to further delever the holding company if you could. But, you know, I think we'd cross that bridge when we got to it.

Thank you very much. Thank you.

Thank you. Our next question has come from the line, and it's Sophie Clark with KeyBank. Please proceed with your questions.

Hi, good morning. Thank you for taking my question.

Good morning, Sophie.

Quick question on the Montana mining, I guess, saturation that you highlighted this quarter. You mentioned that it's not in the plan beyond 2022. Is that just simply not factoring in the contributions from there, or are you planning to dispose of that asset or that investment?

Yeah, Sophie, just in our original plan that we announced back in November and February of this year, we didn't assume earnings contribution from the mine in 23 or beyond. We just had a modest amount factored in in 22. And it's exceeding our expectations in this year.

So the plan is to continue to hold that investment?

I would tell you we've looked at exploring how we transition out of that facility over time. As you can imagine, it's a challenge to do something like that, just given the situation. But it is something that we look at from time to time, and we'll have discussions with the other owners.

Got it. Thank you for that cover. And then on the grid mod, the grid mod plan you filed in Ohio, can you remind us the regulatory cadence of that? What should we be watching as far as dates and discussions with regulators, et cetera?

Yeah, so I would say, you know, to be determined, I think the staff and the commission will need to set a schedule And depending on how things go, you know, that'll drive the schedule. I can't give you a sense of the timeline at this point in time.

I see that. And last, if I may, not to kind of beat this dead horse with pension, but just maybe I missed the remark. Absence of different regulatory treatment that you might get later on, right, when you pursue it, Is there a reason why you cannot smooth out the impact of pension volatility just strictly from the accounting standpoint?

No, I mean, because your pension is... The pension, if you just look at the pure accounting, I mean, you mark the pension. Everybody marks the pension to market and sets pension expense based on the year-end market conditions. And so... that's really what sets pension expense. And so if you look at just the interest component, you're seeing significant increases in interest rates. And then the assets are down 15%. And so that creates the volatility in what I'll call the normal pension exposure for us and, quite frankly, for other companies.

All right. Thank you.

Thank you, Sophie.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Straub for any closing comments.

Well, great. Thank you very much. I just wanted to take a moment to thank everyone for joining us today and for your continued support, and we'll talk to you soon. Thank you. This does conclude today's teleconference.

You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.