FirstEnergy Corp.

Hello, and welcome to the First Energy Corp second quarter 2024 earnings conference call. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Irene Prezel, Vice President, Investor Relations and Communications. Please go ahead, Irene.

Thank you. Good morning, everyone, and welcome to First Energy's second quarter 2024 earnings review. Our President and Chief Executive Officer, Brian Tierney, will lead our call today, and he will be joined by John Taylor, our Senior Vice President and Chief Financial Officer. Our earnings release, presentation slides, and related financial information are available on our website at firstenergycorp.com. Today's discussion will include the use of non-GAAP financial measures and forward-looking statements. Factors that could cause our results to differ materially from these forward-looking statements can be found in our SEC filings. The appendix of today's presentation includes supplemental information along with the reconciliation of non-GAAP financial measures. Now it's my pleasure to turn the call over to Brian.

Thank you, Irene. Good morning, everyone. Thank you for joining us today and for your interest in First Energy. Today I will review our financial performance and highlights for the second quarter, as well as our progress executing our business plan. I will also provide updates on recent regulatory and legacy issue developments, discuss trends we are seeing in the industry, and review the value proposition we offer our shareholders. Looking at our second quarter results, GAAP earnings were $0.08 per share in the second quarter of 2024 compared to $0.41 per share last year. We recorded a number of special items that impacted second quarter gap results, which John will address in a few minutes. Operating earnings for the quarter were 56 cents per share versus 47 cents per share last year, an increase of 19%. Positively impacting second quarter operating earnings were rate adjustments and associated investments to better serve our customers. Customer demand was also a positive impact for the quarter, with weather-adjusted residential and commercial sales up 4% and 7%, respectively. These positive impacts were partially offset by higher planned operations and maintenance expenses and expected dilution from the 30% sale of FET. The items driving growth for the quarter point to the expected trend of improving utility earnings quality. Our capital investments to improve the customer experience increase 22% for the first six months of the year. This is reflective of our improved balance sheet that enables our energized 365 capital plan. We are executing well in 2024 and are on track to achieve the goals we've outlined. Today, we are reaffirming our 2024 operating earnings guidance range of $2.61 per share to $2.81 per share. We are reaffirming our 2024 CapEx plan of $4.3 billion versus $3.7 billion in 2023. And we are reaffirming our 6% to 8% long-term annual operating earnings growth rate. June 1st marked my one-year anniversary with First Energy. Our employees have made a significant amount of progress in the last year, positioning the company for success. From an operations standpoint, We have organized First Energy into four new segments representing our five major businesses. We have restructured the company into a strong operating company model and recruited external and promoted internal executives to lead these businesses. These changes put leadership, responsibility, and decision-making closer to the customer. We are investing in our people by engaging with our unions to enact mid-cycle pay adjustments to help ensure we are paying competitive wages to our representative workforce. We started an effort to hire journey-level line workers to better serve our customers, and we are forming a new apprenticeship program to further support a skilled and well-trained workforce to serve our customers going forward. Regarding capital investment, we initiated our new five-year $26 billion capital investment program, Energize 365, to enable the energy transition and improve reliability and the customer experience. Energize 365 represents a 44% increase in investment over our previous five-year plan. On the regulatory front, we concluded constructive regulatory engagements in Maryland, New Jersey, and West Virginia, representing 35% of First Energy's rate base. In Ohio, we currently have three traditional rate proceedings in flight. We received a constructive order in May for our ESP5 case, but one that left a number of unresolved issues. We have asked for rehearing on those issues and are seeking to obtain more clarity during this phase. We filed a partial settlement agreement in our GridMod2 case in April, focused on deploying automated meters for all of our customers. Hearings concluded on this non-controversial issue on July 2nd, and we are anticipating an order in the fourth quarter. We filed our base rate case in late May requesting a 10.8% ROE and an average equity ratio of approximately 55%. We will be updating that filing today to reflect changes from the ESP5 order and other updates. We expect this case to continue well into 2025. In Pennsylvania, we filed a base rate case in early April requesting a $502 million rate adjustment including an 11.3% ROE and an equity ratio of 53.8%. As is customary in Pennsylvania, we will engage with intervening parties in an effort to reach a settlement prior to the scheduled hearings in mid-August. New rates are expected to be effective January 1st of 2025. Also in Pennsylvania, we filed our Long-Term Infrastructure Investment Plan 3 on July 22nd. This five-year plan will result in approximately $1.6 billion in investments to support enhanced reliability. The proposed LTIP 3 is about twice the investment of the prior plan and demonstrates our ability to invest our strong balance sheet for the benefit of our customers. Finally, in New Jersey, we are currently in settlement discussions for our Energize New Jersey plan, which was filed in November and updated in February. This is a $935 million plan designed to upgrade Jersey Central Power & Light's electric grid infrastructure using modern technology and smart devices to help reduce the size and duration of outages. We are currently in settlement discussions and hope to reach a constructive outcome. From a financial standpoint, the strides First Energy made over the past year to improve its balance sheet were nothing short of remarkable. On March 25th, the company closed its transaction to sell 30% of FET. This was the final transaction of a multi-year $7 billion equity raise that has transformed the future prospects of the company. On July 17th, the company received the last $1.2 billion of the $3.5 billion sale. This cash has been used to pay down short and long-term debt and re-equitize our operating companies. Rating agencies have taken notice with all three rating First Energy Corp's senior unsecured rating as investment grade and S&P and Fitch retaining positive outlooks. Last week, S&P increased FET's senior unsecured rating from BBB- to BBB+, and retains its positive outlook. This two-notch upgrade reflects FET's enhancements in liquidity, governance, and cash management practices and places FET's senior unsecured credit rating at or above the ratings of our fully regulated utilities. This significantly strengthened balance sheet represents a major transformation for First Energy, as well as a significant differentiator for many of our peers. It is on the basis of this balance sheet that we were able to introduce Energize 365 and make the investments needed to enable the energy transition and improve reliability and the customer experience. Many of our peers still have to raise significant amounts of equity to continue to grow or will have to issue large debt volumes at higher rates. First Energy does not have to do either. The balance sheet component of our transformation is complete. We are now focused on executing our operating and regulatory plans for the benefit of our customers. Turning to slide nine, let's talk about data centers. We are getting a fair number of load study requests from data center developers across our service area. Large load studies for this type of development have more than doubled from last year. We are fortunate that in much of our service territory, we have excess transmission capacity to serve this and other economic development priorities. This capacity comes from previous manufacturing, processing, and generating facilities. We are also participating in the PJM open windows related to Dennett Data Center and other load growth. We were successful last year in the Window 3 RTIP solicitation process, and we'll be submitting proposals for the current one. Generation resource adequacy has become a very hot topic over the past year. It appears that load growth and baseload generating retirements could outpace dispatchable generating resource additions. As you know, in four of our five states, we are wires-only utilities. We are working with customers, states, and other interested parties to help ensure there is adequate capacity to meet growing load and enable the energy transition. Finally, regarding potential retail tariff changes, we are reviewing our current tariffs and think there is enough flexibility to allow us to negotiate terms for us to serve new loads and at the same time, maintain existing customer protections. We need to be able to serve all loads affordably. If we find the need for future tariff adjustments, we will file them on a state by state basis. During the second quarter, we made significant progress resolving legacy issues. On July 21st, the U.S. Attorney's Office for the Southern District of Ohio filed a status report confirming that First Energy successfully completed the obligations it was required to perform for a three-year period under the deferred prosecution agreement, including remediation measures and the implementation of a compliance and ethics program. As a result, the reporting requirements related to those obligations have ended. As provided under the DPA, we will continue to fully cooperate with the DOJ on other outstanding matters, and we will continue other reporting obligations. This was an important step as we put the past behind us and move forward as a stronger company with a robust culture of ethics, integrity, and compliance. We have reached an agreement in principle with the SEC staff, subject to the approval of the Commission, which would settle the SEC's security claims against First Energy. The proposed settlement is based on the facts set forth in the DPA. We have recorded a reserve of $100 million for this settlement. Similarly, we are in the final stages of a resolution with the Ohio Organized Crime Investigations Commission. The resolution is expected to include a non-prosecution agreement based on the facts in the DPA and is expected to resolve the Ohio Attorney General's civil case against First Energy. We have recorded a reserve of $19.5 million in anticipation of resolving both Ohio matters. The three docketed cases related to these legacy issues continue to move forward at the PUCO. An audit report is due on August 28th on the political and charitable spending review. Discovery continues and hearing is scheduled for October 9th on the corporate separation review. Discovery is ongoing with the hearing scheduled for February 3rd on the Rider DMR slash DCR audit. We continue to cooperate in these audits and appreciate that these cases are the appropriate form for review of this activity and not our business as usual rate cases. Let's take a moment to review First Energy's value proposition to shareholders. Our six to 8% operating earnings growth rate is predicated on an average annual growth and rate base of 9%. Our ability to invest in our system for the benefit of our customers is enabled by our strong balance sheet. We have the need, opportunity and means to make the necessary investments to enable the energy transition and improve reliability and the customer experience. First Energy has an attractive low risk profile that supports solid BBB credit metrics. We are targeting a 14 to 15% FFO to debt profile over the horizon and do not anticipate incremental equity needs for our Energize 365 investment plan beyond our employee benefit programs. The increase of traditional utility earnings means that our earnings quality has improved and our customer affordability is expected to remain strong for the foreseeable future. Our long-term annual operating earnings growth rate combined with our dividend represent a total shareholder return proposition of 10 to 12%. We have made significant progress on strengthening our balance sheet, restructuring our business, putting legacy issues behind us, and focusing on our operational, regulatory, and financial plans. The men and women of First Energy are singularly focused on that execution and serving our customers. Before I turn the call over to John, I would like to mark two significant management transitions for First Energy. Two executives have recently notified me of their decision to retire after many years of service to the company. Chris Walker, our Chief Human Resources Officer, will be retiring with nearly 39 years of service. I would like to thank Chris personally for all she has done for me over the past year and also thank her for her many years of dedicated service on behalf of our employees. We owe Chris a debt of gratitude and wish her well in retirement. After more than 40 years of service, Irene Prezel has decided to retire. Many of you have gotten to know Irene as our head of investor relations and communications. For many years, Irene has been the face of the company to investors and the public alike. We are grateful to Irene for her leadership and dedication to serving our employees, investors, customers, and the public. We wish her the best going forward. With that, I will turn the call over to John.