FirstEnergy Corp.

Q3 2022 Earnings Conference Call

10/26/2022

spk15: Greetings and welcome to the First Energy's third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. The 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. I would now like to turn the call over to Irene Perzel, Vice President of Investor Relations and Communications, Thank you. You may begin.
spk00: Thank you. Welcome to our third quarter 2022 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 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 to date 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 John Somerhalder, our board chair and interim 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 John Somerhalder.
spk01: Thanks, Irene. Good morning. Thank you for joining us today. First Energy continues to make significant progress in its transformations. Yesterday afternoon, we reported third quarter gap earnings of 58 cents per share and operating earnings of 79 cents per share. These results, which John will discuss in more detail later in the call, are at the upper end of our guidance and support our expectation for full year 2022 operating earnings in the top half of our full year guidance range of $2.30 to $2.50 per share, assuming normal weather. In addition to our strong financial and operational performance year to date, we continue to execute against our strategy to become a more resilient and forward-looking company that is positioned for long-term stability and success. We are building positive momentum through our ongoing efforts to strengthen our culture, rebuild shareholder trust, accelerate improvements of our balance sheet, and drive operational excellence through innovation and continuous improvement efforts. And we are positioning our company to capitalize on significant opportunities for growth through long term customer focused investments. I'm privileged to work alongside strong leadership team in this interim role. And I'm confident that this team and our committed employees will continue to execute on these strategies to transform the company into a best in class utility. And we intend to continue this momentum as we transition to a new chief executive officer. The board's external search is well underway, and we remain hopeful that we can make an announcement late this year or early 2023. The key attributes we're seeking include a strong track record of executive leadership within the utility industry, a demonstrated ability to execute on the regulatory front, leading operational and financial discipline, and impeccable credibility with external stakeholders. Our board is excited about the future of the company and is confident in the leadership team and our strategy. We expect to continue driving the efforts that are already underway to ensure First Energy is built for long-term success, and it's our expectation that the new CEO will see the same strong future that we see for First Energy. We are entering this new chapter from a position of strength. As we continue to focus on balance sheet improvements through organic growth and operating cash flow and our plan to sell an additional minority interest in one of our distribution or transmission assets, we will further accelerate improvements in our credit metrics. Improving our balance sheet to be on par with premium utilities will support higher levels of capital deployment to harden and modernize the electric grid and support the energy transition. Before I turn the call over to John, I want to thank our employees for their efforts to move First Energy forward over the last few years. They have been asked to step up time and time again to serve our customers, meet our commitments to stakeholders, and stay focused on strengthening our company for the future. They continually rise to the challenge. Their hard work is helping us make great strides towards implementing our strategy and achieving our vision, and the board remains committed to providing them with the support and resources they need to carry this company forward. I'm confident in the strength and talent of our team and our future. Now I'll turn the call over to John Taylor.
spk08: Thanks, John, and good morning, everyone. I'm glad you can join us for today's call. We continue to execute on our strategies as we drive strong operational and financial performance. I'll start my remarks with a review of some regulatory and business updates, then we'll move to a discussion of financial results and expectations. Starting in Ohio, we are nearing completion of the first phase of our grid modernization program, which began in 2019 and included installing more than 700,000 smart meters with supporting communications and data management systems, and voltage regulating and distribution automation equipment on over 200 circuits to help provide our customers with enhanced reliability and power quality, along with greater visibility into their electric usage. To continue this successful work, in July of this year, we filed for our grid modernization phase two, a four-year, $626 million capital investment program that proposes to deploy an additional 700,000 smart meters, distribution automation equipment on nearly 240 circuits, and voltage regulating equipment on nearly 220 circuits. It also includes pilot programs related to electric vehicle charging and battery storage. Together, these programs are designed to enhance the delivery of safe, reliable power while offering our customers modern experiences, emerging technologies, and opportunities to help lower their bills. In West Virginia, the Public Service Commission approved a settlement agreement for environmental compliance projects at the Fort Martin and Harris power stations to meet the US EPA's current affluent limitation guidelines required to operate both plants beyond 2028, as well as a surcharge to recover the expected $142 million of capital investment, along with annual operation and maintenance expenses. We currently expect to complete this construction by the end of 2025. These projects allow us to responsibly operate these power plants for the benefit of our customers in the state through 2035 and 2040 as we continue to support a timely and clean energy transition. At the same time, we continue securing commitments from residential, commercial, and industrial customers in West Virginia to purchase solar recs from our five planned utility-scale solar generation facilities. totaling 50 megawatts. As part of the conditional approval by the West Virginia Public Service Commission, MonPower is required to obtain subscriptions for at least 85% of the facilities prior to filing for final approval. The customer response has been favorable and we expect to reach the 85% threshold before the end of the year. Our expectation is that our first solar generation site will be in service in 2023 with others to follow by 2025 at a total investment of approximately $100 million. This progress, coupled with other regulatory outcomes this year around smart meter and electric vehicle programs in New Jersey, go a long way in executing on our strategy to improve the customer experience through investments that modernize the grid and support the energy transition. As we think about the future, we are preparing for an active regulatory calendar in 23 and 24. We have planned rate case filings in New Jersey, Maryland, and West Virginia, all in the first half of 2023. For JCP&L, we last filed a case in 2020, and for West Virginia and Maryland, our last base rate case was filed in 2014 and 2018, respectively. The planned rate cases will primarily address our lower equity returns, as highlighted in the presentation, which are the result of the significant capital investments we have made since our last rate case and changes in operating expenses, and include the accounting changes that we have previously discussed, such as vegetation management and corporate support costs. In addition, the New Jersey rate case would address our smart meter and electric vehicle programs. The Maryland case would address our electric distribution infrastructure investment and EV program. And in West Virginia, we plan to file for new depreciation rates resulting from a depreciation case to be submitted later this year. Also, as you recall, our existing Ohio Electric Security Plan expires on May 31st, 2024. Thus, we plan to file a new ESP in the first half of 2023, which will include a proposal around our generation procurement plan. An ESP also provides an opportunity for provisions regarding distribution service, such as capital recovery riders, as well as additional programs that can provide benefits to our customers, such as energy efficiency. In the months ahead, we intend to engage Ohio stakeholders in a discussion about our proposed ESP5. As we've mentioned on previous calls, we have been considering the potential consolidation of our Pennsylvania and Ohio operating companies into two state utilities. While we continue to evaluate our options in terms of timing for a potential Ohio consolidation, we expect to file an application in Pennsylvania within the next six months. Consolidating these utilities will align with our five-state operating model, simplify our legal entity structure, and increase the flexibility and efficiency of our financing needs. In 2024, we are required to file a base rate case for our Ohio utilities, and we are beginning to explore the option of filing a rate case in Pennsylvania at some point within our current planning cycle. Finally, in these regulatory filings, we plan to adjust recovery of regulatory asset balances, such as deferred storm costs, which currently amount to approximately $680 million across all of our jurisdictions. In September, Ohio Edison issued $300 million of 10-year notes at 5.5%, and we have one more transaction to complete this year at West Penn Power as we continue executing our debt financing plan. While interest rates have increased, interest expense remains manageable through 2024, as our new money requirements are minimal and our debt maturities over this same period have higher coupons, averaging near 5%. Additionally, filing for new base distribution rates in all of our jurisdictions over the near term will allow us an opportunity to address the increased cost of debt. We remain focused on improving the credit profile of the company. During the third quarter, we repurchased approximately $140 million of holding company debt in the open market, bringing our total holding company debt reduction to $2.5 billion this year, which is more than a 30% reduction from the end of 2021. Also, as John mentioned, we are pursuing the sale of additional minority stake in one of our distribution or transmission businesses. This would follow our very successful transaction with Brookfield Supercore Infrastructure Partners for a 19.9% interest in First Energy Transmission, LLC, that was completed in May of this year at a 40 times PE multiple or three times rate base for approximately $2.4 billion. While we don't have any additional details at this time regarding a proposed transaction, we remain focused on accelerating our balance sheet improvement efforts in a cost-effective manner with a goal of achieving 14 to 15% FFO to debt much sooner than originally planned. We had a robust discussion about the pension during our second quarter call, and our approach has not changed. Extreme volatility in both interest rates and global equity markets continue. The discount rate that measures our pension obligation increased from 3% at the end of 2021 to approximately 5.5% as of September 30th, while asset losses in our qualified pension trust were approximately 22% through the same day. Despite the asset performance, our net qualified pension obligation improved over $400 million from 2021 to approximately $1.6 billion at the end of the third quarter, with the plan's funded status at 81%. The potential 2023 EPS headwind from the qualified pension plan has increased from 30 cents as of June to approximately 45 cents as of September 30th. As we communicated in July, we are confident in our mitigation plan to address the 30 cents. This includes costs we have already begun accelerating into 2022, the benefits from our balance sheet improvement efforts, specifically the $1 billion of high coupon debt that we retired in June, and the expected uplift from other corporate cost reductions and earnings from our legacy investment in the Signal Peak mining operation. We will also continue contemplating longer-term regulatory approaches to moderate the impact of market volatility on our pension plan. And we would look for additional offsets if the outcome as of December 31st exceeds 30 cents. While an impact larger than 30 cents would affect 2023 earnings, we don't plan to pursue short-sighted gains that could take us off track for the future. Our solid and sustainable investment pipeline focused on providing reliable service to customers continues to firmly support our long-term plan for 6% to 8% growth. Our focus remains on controlling what we can control and creating value over the long term through regulated investments, operational and financial discipline, and an improved credit profile. Our financial performance this quarter speaks to the continued resiliency of our business. Third quarter gap earnings were $0.58 per share and operating earnings were $0.79 per share, near the top of our guidance range. GAAP results primarily reflect a one-time charge as a result of implementing recommendations from the FERC audit, which covered the period going back to 2015, and resulted in certain write-offs and expected refunds. On a pro forma basis, excluding the impact of accounting changes, rate credits provided to Ohio customers, and equity financing transactions, which are all unique drivers this year, our third quarter operating earnings increased 11 cents per share. or 16% compared to the same period in 2021. On a year-to-date basis, we reported gap earnings of $1.42 per share and operating earnings of $1.91 per share. Again, on a pro forma basis, adjusting for the accounting changes, the Ohio rate credits, and equity transactions, we achieved a 17-cent improvement in operating earnings compared to the first nine months of 2021, or nearly 10% year-over-year growth. Third quarter results in our distribution business benefited from higher weather related demand, the positive impact of our capital investment programs and lower financing costs. These benefits offset higher operating expenses associated with accelerating future plan maintenance work from 2023 into 2022 and higher material costs. Total and weather adjusted distribution deliveries were essentially flat compared to the third quarter of 2021. Warmer summer weather and stronger demand from industrial customers, reflecting the continued rebound in many industrial sectors within our service territory, was partially offset by lower year-over-year weather-adjusted residential usage. Residential sales decreased 1% from the third quarter of 2021 and a little less than 2% on a weather-adjusted basis. However, sales to residential customers remain higher than pre-pandemic levels by nearly 3%, on a trailing 12-month basis, reflecting a permanent structural shift in this high-margin customer class. Deliveries to commercial customers decreased 1% or close to 2% on a weather-adjusted basis. And sales to industrial customers increased approximately 2%, led by growth in fabricated metals, automotive, food manufacturing, education services, and plastic and rubber. Third quarter industrial sales were down approximately 1% compared to pre-pandemic sales. In our transmission business, third quarter results primarily benefited from continued formula rate-based growth associated with our Energizing the Future investment program and lower financing costs. Our ongoing investments in this important program have added more than a half a billion dollars in additional rate-based since the third quarter of 2021. Key projects currently underway include replacing more than 1100 insulators, along a 68-mile transmission line corridor in Northeast Ohio to ensure power reliability and resilience, a new substation in Ashland County, Ohio, to meet the area's future energy demands in supporting economic growth, and planning for a new high-voltage substation to support a data center campus that is under development in Frederick, Maryland. And finally, our corporate segment benefited from higher investment earnings from the Signal Peak mining operation. and lower financing costs primarily related to our holding company debt redemptions throughout the year. With our strong results so far this year and our outlook for the next two months, assuming normal weather, we expect 2022 operating earnings at the top half of our guidance range. Additionally, we are on track to meet our cash from operations target of $2.6 billion to $3 billion this year and improve operating cash flow consistent with earnings over time. In mid-February, along with announcing our fourth quarter and full year 2022 results, we plan to provide you with 2023 guidance, along with updated capital and other plans to support our future growth. I, too, am proud of our progress to revitalize our culture, optimize our performance, and improve our financial profile. We are energized by our transformation and look forward to taking the next steps to become a premium utility. Now, we'll open the line to your questions, as always, I appreciate your time and your interest in First Energy.
spk15: 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. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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. One moment, please, while we poll for your questions.
spk07: Our first questions come from the line of Char Perez with Guggenheim Partners.
spk15: Please proceed with your questions. Hey, guys.
spk01: Good morning, Char.
spk12: Good morning. John, just, I guess, just given some of the pressures we've seen with inflation and interest rates, I guess, How much of the 30 cents of pension headwind that you previously disclosed have you sort of been able to offset to date with some of the O&M and financing moves you've done recently, especially as we're layering in signal peak, which essentially is printing money given sort of the coal price moves? And just on the incremental 15 cents, you know, you mentioned obviously you're looking at additional offsetting opportunities. What could those be?
spk08: Thanks. Thanks for the question. Obviously, it's been a very fluid situation with the pension. During the quarter, the pension improved from $0.30 as of the second quarter to close to a $0.20 headwind in the mid-August timeframe, and then it's ratcheted back up to $0.45. I would tell you with the moves that we've already made with our financing plan, the OPEX that we're accelerating into 2022, and the insight that we have into signal peaks earnings for next year, at least the sales that they have locked in at this point in time, we've captured the majority of the 30 cents. And we just have a little bit left to do on the remaining 30 cents, which we feel very confident in. So with respect to the 30 cents, we feel very strong about it. But like we said in our prepared remarks, if it's above 30 cents in a material way, we'll look for opportunities. But we're not going to take the business off track for the long term. Got it.
spk12: Got it. And then just maybe a strategic question and maybe a little bit more theoretical, just, just an asset optimization, obviously, you know, it's been a bit more challenging doing deals at this kind of like an interest rate environment. Um, the buyer pool, I would think is shrunk a little bit. Are you still only open to selling a minority stake of let's say Pennsylvania, or can we see, can we, can we see you make, could it make more sense kind of in this environment? to look at an entire opco, which could actually expand the buyer pool to bring in more strategics versus just financial players. And obviously some utilities are looking for assets right now, but not sure they want a small stake in one. Thanks.
spk01: Yeah, we've seen continued strong interest for minority interests, either in a distribution business or additional sale of transmission facilities. Since that has remained strong, that works very well for us, either 19.9% interest in the distribution business, which has tax benefits, or potentially with strong value we continue to see in transmission, even though there will be some tax consequences, that has value. That's the direction that we think makes the most sense, and based upon what we're seeing to date, we feel good about that direction. John?
spk08: Yeah, I would agree. I mean, when we made the announcement in September, we had several inbounds from financial players showing strong interest in either a transmission or distribution business. We've had some conversations with several parties, and the interest continues to be strong. You know, we're continuing to work the process internally, and hopefully we can get into a position where we can make an announcement either late this year or the first part of next year.
spk12: Terrific. Thank you, guys. That's actually very good color. Appreciate it.
spk15: Thank you. Our next question has come from the line of Steve Fleschman with Wolf Research. Please proceed with your questions.
spk02: Yeah. Hi. Good morning, John and John. So just... For John Taylor, the pension, I know you probably don't want to get into marking pension every day, but the market's back to Q2 levels, and I think it's up almost 8% this month. And I know bond markets still weaken further, but just overall, if you kind of update it to roughly where things are now, where would you be relative to that $0.30 or the $0.45?
spk08: You know, Steve, it's probably in the same place or maybe modestly improved since September. You know, interest rates have continued to increase. Corporate spuds have expanded a little bit, which not only impacts the interest costs on the liability but also impacts, you know, the value of our fixed income assets in the trust. So I think it's modestly better. than the 45 cents, but not significant.
spk02: Okay, great. And then on the CEO, the comments that you made, John, some are older on just what you're looking for in a CEO. I mean, those sound all great. And I guess the real question is, what's your conviction that you can find somebody who come that meet all these credentials from what you've kind of seen so far?
spk01: You know, the good news is the process is, you know, we've made good progress already on it. And we've identified, you know, more than a couple dozen individuals that meet these, the criteria could be very good. And I would say that, you know, the interest level has been solid and strong as well. So, We anticipate that we'll have a shorter list, but still a list approaching 10 individuals that both are very well qualified, fit very well with our strategy, and have interest at this point. So we're encouraged at this point.
spk02: Okay, that's good. And then lastly, just on the continued balance sheet progress, any sense from... the standpoint of the rating agencies on the potential for getting upgraded to investment grade, either late this year, by the end of the year, I guess. John?
spk08: Yeah, we talked to them just a few days ago, and the conversation was constructive. I think we continue to execute against the plan that we provided them, and we continue to have conversations on timing. I think they're just waiting for You know, they just want to see us continue to execute. They are interested in what we're going to do with the minority interest sale and how that improves the metrics. And once we get into a place where we can make an announcement, we'll put that into the forecast and start having conversations then. But, you know, the conversations have been very constructive. I think it's just a matter of time.
spk02: Okay, great. Thanks a lot.
spk01: Thanks, Steve.
spk15: Thank you. Our next questions come from the line at David Arcara with Morgan Stanley. Please proceed with your questions.
spk10: Hi, thanks so much for taking my question. Maybe just starting on the pension first, I was just wondering, could you consider selling part of the pension and then or is there a regulatory approach that you could pursue? We saw PEG in New Jersey file a request with the BPU. with a different way to consider accounting for the pension there. I'm wondering if either of those might be feasible options that you're looking at.
spk08: Yeah. So, Dave, I think for us to, you know, I don't know, you know, if we were to try to sell the pension obligation. I mean, given its funded status, you know, that might be a little bit of a challenge to offload that obligation to like an insurance company or something like that. So I'm not sure that would be something that we would pursue. With respect to regulatory mechanisms, as we file base distribution cases over the course of the next couple, three years, we will absolutely look at ways that we can limit volatility exposure in the pension plan at our regulated companies. So that is something that is definitely on the table at this point in time.
spk10: Okay, great. That's helpful. And then in the slide, you had mentioned 20 to 40 bps of FFO to debt impact coming from AMT. And I was just wondering, would you consider that to be kind of structurally permanent going forward, or are there potential offsets that you could find on the cash flow forecast to help with that drag coming from AMT?
spk08: Yeah, so I mean, you know, obviously we need much more clarity from the Internal Revenue Service on, you know, the mechanics of the minimum tax. I mean, the 20 to 40 basis points is not, you know, significant in the grand scheme of things when you think about FFO approaching $3 to $3.3 billion over the course of the next handful of years. So obviously we'll look for opportunities to offset that. either through regulatory mechanisms or just further refinement in our operations. But, you know, I think to understand the final impact or the real impact, we just need a little bit more clarity from the IRS.
spk01: Yeah, and David, I'd mention that, you know, we do see that impact as we move forward, but we have the other positives of Just when we look at our ability to fund capital and increasing capital, we have enough cash to pay dividends, do that, and the balance sheet improves moving forward. So just our plan will continue to improve the balance sheet as we move forward. And then obviously the minority interest sale further accelerates that. So we do have other very positive ways to move the balance sheet where it needs to be, even with this 20 to 40 basis points of impact. from A&T.
spk11: Yeah, that makes sense. Yeah, definitely smaller than some of the big positive changes that you're looking for. Thanks so much.
spk01: Thanks, David.
spk15: Thank you. Our next questions come from the line of Michael Lapidus with Goldman Sachs. Please proceed with your questions.
spk05: Hey, John, and John, thank you for taking my questions. Real quick on Ohio. Can you just remind us, with the ESP expiring late May next year, and also the potential for having to file a full-blown rate case at some point, do you think about, in your conversation with stakeholders there, whether there's potential for a global settlement of some kind where you wrap all of those things into one kind of multi-year rate-making regime? rather than have potentially two different proceedings or dockets and somehow resolving to create more long-term certainty about the regulatory framework in the state.
spk08: Michael, thanks for the question. I would tell you that we'll file for the ESP-5 sometime next year. We have to make sure that we have a plan to procure generation for our customers beginning in in June of 24. We also need to make sure that we have clarity on the capital recovery riders that we have in place and any other types of programs that will provide service to customers, like our grid modernization program, any types of energy efficiency programs that we want to put in place. So I kind of see these as two separate work streams. One for the ESP-5, which needs to be approved before we get into the June 2024 time period. And then with the rate case that we have to file in May of 24, you know, obviously, you know, we have a history of settling, but given where we are right now, my sense is that's going to be a fully litigated case and might take us out into the, you know, late 25 timeframe before we get final approval on that.
spk05: Got it. Super helpful. And then one thing on Signal Pink, I mean, you've benefited from What's happened to commodity prices, although we've had a bit of a pullback over the last couple of months, and part of that is macro or trying to shut in a number of things. Is there a scenario where you look at yourself and say you're not the logical owner of that stake? And how should we think about the market robustness for something like your stake in Signal Peak, as well as the tax ramifications or implications for y'all if you were to be a seller of that stake?
spk08: Yeah, I wouldn't say, you know, the market is robust for that type of asset. You know, even with commodity prices where they are, I wouldn't consider it a robust market. We've had some interest in terms of people calling us about the asset, you know, but as we, you know, started the dialogue, it just didn't make sense. And we're continuing to be open to those types of, you know,
spk05: transactions and those types of discussions but at this point in time i wouldn't consider it robust got it and and last one um can you remind me what's the capital you're deploying in west virginia to meet the environmental requirements and are you getting a forward-looking or historical looking uh cash return on that it's a it's 140 million dollar capital investment for the affluent limit guidelines
spk08: And I think it's in the form of a surcharge that will be recovered based on the capital you spend.
spk01: And importantly, I believe the depreciation rate for those dollars are in line with what we see as a logical end of life closer to 2035 or 2040 for the two plants. So we have that positive as well.
spk05: Got it. Thank you, John. Thanks, John.
spk01: Thanks, Michael.
spk15: Thank you. Our next questions come from the line of Julian Doman Lynn Smith with Bank of America. Please proceed with your questions.
spk14: Hey, good morning, team. Thanks for the time. Appreciate it. Listen, I know things are going real time here in parallel with the New Jersey BPU. Can you comment at all about offshore opportunities here? It seems like you may have just won in recent minutes here a decent chunk on that effort here. But can you comment as best you understand in your position here? I get that this is happening literally in real time, but any commentary or initial thoughts or at least provide some perspective about what you guys have already felt, if you can?
spk01: Yeah, it is happening in real time. I mean, we have not yet reviewed the order or the details, but we do understand that, you know, our proposal has been successful to a large extent and something that potentially approaching a billion dollars of investment over the next eight to ten years, which we view as very positive and additive to our plan and why it's so important to have our balance sheet, you know, the strength that we're targeting. You know, so we're pleased with that. We're very happy to be a part of, you know, meeting New Jersey's clean energy needs. in a way that really works for the customers. And, you know, we're using more existing, or we're using existing right-of-way impacts or less. So we're very positive, but we'll need to review the order and make sure, you know, that we have more detail. Like you said, Julian, it's late-breaking. And I'd ask John, Sam, or Camillo to update if there's anything else that I missed on that.
spk08: No, I think I don't have anything else. I mean, obviously it would be incremental to the plan that we have provided for to investors. I think the capital would probably start being deployed sometime in 2024, 2025, potentially. So in the last couple of years of our current planning cycle, but would be an uplift to our plan going forward. So we're excited about that. But yeah, we just, like John said, need to review the order and make sure we understand it.
spk14: Yep, understood. Thank you guys for at least attempting to broach that one here. Meanwhile, back to the scheduled program. On 2023, I know there's been a lot of talk about pension here and the puts and takes, but can we talk about two other comments? First off, Pennsylvania, as best I understand, this is the first time we've seen you guys indicate you're filing for a case. Can you talk about, A, just – how much of 2023 we could see an uplift? I mean, you document in your slides here earning a high 7% earned. How swiftly could we see that improve potentially? Again, I don't want to prejudge the rate case outcome, but certainly some potential revenue deficiency is there. How much of an offset could that be to the 45 cents? And in tandem, I know in the queue that was discussed, this allocation question on a new methodology that you guys have implemented, and it seems like that's shifting some capex to expense. Can you comment a little bit more prospectively on how much more expense that would drive in 23 onwards versus your earlier rate base and capex forecast? It's not entirely clear here.
spk08: Yeah, okay, Julian. So let me maybe just take those one at a time. All right, so with respect to Pennsylvania, We're going to file three cases next year, New Jersey, West Virginia, and Maryland. My sense is we'll file those sometime in the first part of next year. You probably won't see new rates until the end of next year or first part of 24 as part of those cases. I'm not anticipating really any uplift from those three cases in the plan for next year. Probably start rates effective sometime in and 24. With respect to Pennsylvania, we said we're considering to file a case. But the thing about Pennsylvania, it's a forward-looking test year. So we could file that sometime late next year, first part of 24, with rates effective probably six to nine to 12 months thereafter. So I don't anticipate anything from Pennsylvania. next year given our current regulatory plan. With respect to the cost allocations, that's the accounting changes that we've been talking about since, you know, late last year, Julian, where we reclassified certain of our costs from capital, corporate support costs from capital to O&M. That's already in the plan. That's already in the 6% to 8% growth, so there's not going to be any impact from that. going forward.
spk14: Got it. Excellent. And then just with respect to Pennsylvania, presumably that also enables you to accelerate some of the capital spend there and some considerations maybe around enabling the disk?
spk08: Yeah. So the current LTIP program expires at the end of 24. So obviously we would have to file another application to expand the LTIP. beyond that period. So I think all of that would happen together. And I do see Pennsylvania as an area where we could start to increase our CapEx there, just given some reliability enhancements that we want to make.
spk14: Got it. Excellent. All right, I'll leave it there. Thank you, guys. Good luck with the search.
spk01: Thanks, Julian.
spk15: Thank you. Our next question has come from the line of Angie Storzinski with Seaport Global. Please proceed with your questions.
spk03: Thank you. So first in Pennsylvania, the likely consolidation of your distribution companies there, do you need to have it done before you potentially sell a minority stake in these businesses?
spk08: You don't have to have it done. If you were going to explore, for instance, a minority interest in our Pennsylvania business, you could do it at the same time. You could probably make a filing to consolidate the Pennsylvania companies and file an application to sell a minority interest, you know, maybe not exactly at the same time. Maybe one, you know, the consolidation first, but then the minority interest sells slightly or shortly thereafter. But you could do it commensurate.
spk03: Okay. And then separately, as you pointed out, you have this very busy regulatory calendar for the next two years. And it happens at a time when regulators are scrutinizing the affordability of electric bills. I mean, how do you plan to address this issue and how do you think it is likely to impact the outcome of those proceedings?
spk08: Yeah, so the three states that we file in next year, if you just look at our total customer bills on a residential basis, we're probably probably 15 to 30 percent lower than the peers in those states. And so we feel like we have a good story to tell in terms of our customer bills. We recognize that generation prices are increasing. But at the same time, I think it's important to make sure that you have strong and and financially healthy utilities to make sure that we can provide the level of service that's needed, given the fact that, you know, customer expectations are only increasing as we transition to more electrification. So I feel like we have a good story, but we do recognize the concern that you mentioned.
spk03: Okay. And lastly, is there any update on the pending FCC investigation?
spk08: on the pending SEC investigation. No update at this point in time.
spk01: Okay, thank you. Thanks, Angie.
spk15: Thank you. Our next question has come from the line of Nick Campanella with Credit Suisse. Please proceed with your questions.
spk09: Hey, thanks for taking my question. I just wanted to come back to the pension headwind and 23 and, you know, kind of recognizing the fact that you you know, reaffirmed the long-term six to eight CAGR still. Can you just give us a sense of just, you know, overall kind of confidence level in maintaining this into 24 and 25? And, you know, what are the drivers that you see that kind of keep you in that six to eight kind of range? You know, I know you kind of brought up new rate filings and obviously there's interest expense reductions from the debt pay down strategy, but could you just give us a better sense of your overall confidence level on the CAGR, please?
spk08: Yeah, I mean, I think we've tried to highlight that previously. We feel really good about the plan for next year and beyond. I mean, obviously, we're moving some expenses around this year to help offset 23, which gives us a lot of flexibility going into next year. We're going to have the permanent benefits associated with the debt tender transactions that we previously completed. And then, you know, We have line of sight into signal peaks earnings for next year, at least a modest portion of what they plan to contribute to the company. And then we have other opportunities, as we've highlighted before, around corporate cost reductions, whether it be facilities costs, in our communications, advertising, sponsorships that we look at each and every year. So we have a lot of opportunity and flexibility as we think about the long-term growth of the company.
spk01: Yeah, I'd add to that. It's not only those items, but as we mentioned, getting the balance sheet where we want it. There's good opportunities, we think, to benefit our customers on reliability and those type issues to continue to invest in the business. We see with our balance sheet strong, a good affordability position we start at, even though we'll take into account, you know, commodity prices being up. We do see opportunity to invest more moving forward and grow earnings from those investments.
spk09: And then, John, you mentioned on Signal Peak that you locked in the sales largely for next year. So should we be kind of thinking about that earnings attribution as more fixed now rather than tied to commodities?
spk08: Yeah, no, I think I highlighted they locked in a modest amount of their production for next year at prices consistent with what we're seeing this year. So we do have line of sight into some level of earnings contribution for 23. So they haven't locked in their full production schedule at this point in time. They'll likely get that done by the end of the year. Thanks for the clarification. Appreciate it. Thanks, Nick. Thanks, Nick.
spk15: Thank you. Our next question has come from the line of Paul Fremont with Mizuho. Please proceed with your questions.
spk06: Thank you. My first question is, does your plan mid-23 Ohio filing, does that represent a change in timing from what, from when you had originally planned to file a GRC in Ohio?
spk08: No, no. So two separate filings, Paul. The base distribution rate case will file in May of 24.
spk10: Oh, okay.
spk08: And then the ESP will file for sometime early next year, first part of next year, because it's going to take a little bit of time to get that in place and get that approved by mid-24 when it needs to go into effect.
spk06: Okay, and what's the difference then between the ESP filing and the GRC filing? I mean, aren't they essentially setting the sort of prices for the same electricity?
spk08: So the ESP, the electric security plan, is a more broad plan that deals with, you know, generation service that you're going to be providing to customers, how you're going to procure those services from third-party suppliers. It also allows you to look at your current riders, distribution, capital recovery riders, other programs that you want to provide to customers. So it's really everything but distribution rates. And distribution rates would be part of the base rate case in 24, which likely won't go into effect at the earliest until sometime late 25. And then...
spk06: Can you quantify what the signal peak contribution is expected to be for the full year 22?
spk08: It'll be north of 20 cents, probably somewhere 20 to 25 cents is what I'm guessing.
spk06: Okay. And last question for me, if you file to consolidate the Pennsylvania operations, do you plan any type of capital contribution to MedEd and Penelec before that happens?
spk08: We haven't contemplated that, Paul. If I look at the capital, the equity ratios in those businesses today, They're probably high 40s, if not in the low 50% range, so I wouldn't see a need to make any type of capital contributions into those companies.
spk06: Okay. That's it for me. Thank you.
spk08: Thanks, Paul.
spk15: Thank you. Our next question has come from the line of Sophie Clark with KeyBank Capital Markets. Please proceed with your questions.
spk04: Hi. Good morning. Thank you for taking my question. First, I wanted to ask you about O&M. Absent new rates, how much offset do you have, you know, to higher cost excluding pension headwinds, right, from inflationary pressures? Are there any mechanisms that you have now that could help you with those? Or do you have to just manage and absorb the increases until you get new rates?
spk08: Yeah, we don't have – for our base – you know, what I'll call our base, you know, day-to-day operating expenses. We don't have any type of, you know, regulatory mechanisms to, you know, mitigate, you know, inflationary pressures or anything like that. So, you know, it's really up to the company to manage our operating costs in between rate cases.
spk04: Okay. And is there any way that you could get interim rates when you file the slew of rate cases next year?
spk08: When you say interim rates, are you just referring to some type of tracker?
spk04: You know, so we've seen companies... Interim rates that are put in place until the rate cases decided to help with the liquidity situation, you know, like it's opened the case in various jurisdictions.
spk08: No, I don't think that is something that, at least that I've seen. Obviously, we would explore that, but I haven't seen that before, especially in the states in which we operate in. Now, I have seen companies get trackers, for instance, for vegetation management or other big spins that they have where they can defer costs over a certain level you know, and then take care of that in the next rate case or have some type of amortization of those costs, you know, built into their rates. But, you know, right now we would have to file for a case and then get those types of mechanisms in place going forward.
spk04: Great. Got it. Thank you. And then I'm going to talk about Pennsylvania utilities. If you were to contemplate consolidating those operations, right, would that happen concurrently with filing rate cases before or after? How would that, I guess, work together?
spk08: Yeah, my sense is we'll file to consolidate first, right? So we'll plan to file sometime within the next couple, three months or six months, and then we'll likely file a rate case, you know, at some point after that.
spk04: Thank you. This is all for me.
spk01: Thanks, Sophie.
spk15: Thank you. Our next question has come from the line of Greg Orrell with UBS. Please proceed with your questions.
spk13: Yeah, thank you. Just to follow up on the offshore wind in New Jersey, what return would you be allowed in the transmission that you were talking about?
spk08: Yeah, so Greg, in the filing, we filed a 10.2% return on equity. So that was what was in our filing.
spk13: And how are you thinking about that 20% equity stake option in the project?
spk08: Yeah, obviously that gives us optionality. We have the option to buy into the offshore component of the project. So that definitely gives us another opportunity to invest in a transmission-like investment.
spk01: Yeah, but we have not made any final decisions on that. I think that's a good option for us to evaluate for our board to consider, but we have not made final decisions on that.
spk13: All right, thank you.
spk01: Thank you, Greg.
spk15: Thank you. There are no further questions at this time. I would now like to turn the call back over to John Semerhalder for any closing comments.
spk01: Yeah, thank you, and thanks, everyone, for joining us today. We appreciate your continued support, and we look forward to seeing many of you at the EEI conference next month.
spk15: This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q3FE 2022

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