FirstEnergy Corp held its Second Quarter 2023 Earnings Conference Call, with Irene Prezelj, Vice President of Investor Relations and Communications, introducing the call and Brian Tierney, President and Chief Executive Officer, leading the discussion. The company reported second quarter GAAP earnings of $0.41 per share and operating earnings of $0.47 per share, both higher than the previous year. The call focused on the company's results, dividend update, reason for Brian Tierney joining FirstEnergy, earnings from key stakeholder engagement, and outlook for the future.

The electric company reported GAAP earnings of $0.92 per share for the year-to-date period, compared to $0.83 per share from the same period last year. This was largely due to mild weather, which reduced earnings by $0.18 per share compared to the same period in 2022. The company has been disciplined about cost structure and investments, and is confident in reaffirming its 2023 operating earnings guidance. The board declared a dividend of $0.39 per share, and is expected to have one additional dividend payable this year. The board also approved a new targeted payout ratio of 60%-70%, reflecting the company's improved credit profile and commitment to enhancing value for investors.

FirstEnergy is a wires-only electric utility in four states and a fully integrated company in one state, and is well-positioned to enable increased demand and facilitate the energy transition. The company has strengthened its balance sheet by executing a $1.5 billion convertible senior note transaction in the second quarter. The board and management have taken responsibility for the activities of the past few years and are cooperating with the Department of Justice on any requests.

FirstEnergy CEO has had the opportunity to meet with key stakeholders, employees, and commissions in the past 60 days. Employees remain focused on safety and customer service and are asking for resources to better serve customers. The CEO has committed to investing in the system and employees, and expressed the company's desire to engage constructively with the commissions for the benefit of customers. He has not detected any regulatory overhang from the past that would impact their forward-facing activities.

FirstEnergy has regulatory cases in multiple states with rate bases totaling $17.5 billion and returns that need to be updated. The company has recently added two key hires and is currently looking to fill the COO role. Over the past two years, FirstEnergy has consolidated key functions to create efficiencies and consistency. They are also looking for ways to make decision-making closer to the customer and employees. The company has been discussing plans for organic investment and growth with investors, focusing on investments in the electric grid, management additions, and the regulatory schedule necessary to convert investment into growth.

Brian has met with three major rating agencies and made commitments to improve the company's credit metrics and balance sheet. He believes that the company has the necessary elements for success, such as a skilled workforce, a constructive regulatory environment, and a strengthened balance sheet. He has reaffirmed the company's guidance for 2023 and its 6%-8% long-term growth rate. He is excited about the company's future and has turned the meeting over to John for more financial detail.

In the second quarter of 2021, GAAP earnings were $0.41 a share and operating earnings were $0.47 a share, compared to second quarter 2022 earnings of $0.33 a share and $0.53 a share. Mild temperatures impacted residential demand by 8% and total customer demand by 4%, resulting in a $0.06 a share decrease. Commercial demand decreased 6%, while industrial demand increased by 1%. The transmission business benefited from the energizing the future investment program and associated rate-based growth of more than 8%.

In the second quarter, the company was able to deploy nearly $400 million of capital into their transmission investment program, bringing their year-to-date investments to nearly $750 million. This was helped by lower operating expenses and lower interest costs, and the team was able to confirm their guidance range for the year of $2.44 to $2.64. The company has been focusing on their cost structure, with their O&M improving by $0.13 a year, and they have taken steps to reduce costs and accelerate maintenance work. In May, they also completed a successful sale of $1.5 billion in convertible senior notes.

The company has made cost-effective moves to improve their balance sheet, such as repaying high-cost short-term borrowings and reducing 738's coupon debt at FE Corp. As a result, their net qualified pension obligation has improved to $800 million and they have no minimum funding requirements until 2027. In addition, they expect a lower effective tax rate of 17%. They have three base rate cases filed earlier this year, which represent over $7 billion of rate base and have a weighted average test year return on equity of less than 6%. These cases are progressing well through the regulatory process and evidentiary hearings are scheduled for early January of next year in New Jersey for a proposed revenue increase of $193 million.

Last month, Maryland held constructive hearings for a proposed $50 million rate case, which if approved, would provide 10.6% returns. In West Virginia, a $207 million rate case was filed in May, requesting a $3.2 billion distribution rate base and 10.85% return on equity. In Ohio, an Electric Security Plan 5 was filed with proposals to support low income customers and electric vehicle incentives, as well as a Grid Mod 2 filing with $626 million in capital investments. Hearings are scheduled for November and October, respectively, and if approved, new rates in Maryland and West Virginia are expected to go into effect in October and March, respectively.

FirstEnergy has submitted applications to FERC and the Pennsylvania PUC to facilitate the FET minority interest sale, which has been approved by the Virginia State Corporate Commission and requires review by CFIUS. Pennsylvania hearings are set for next week to consider their application to consolidate their four distribution utilities, and they are in settlement discussions with the parties to the case. Mon Power is no longer reviewing the possible purchase of the Pleasant Power Station, and FERC has approved the sale to a subsidiary of Omnia's Fuel Technologies. The regulatory team is doing a good job and the progress is consistent with their plan.

Jeremy Tonet asked Brian Tierney and Jon Taylor about the OO CST subpoena and its potential impact on the DPA. Tierney and Taylor both explained that the subpoena was related to the activities outlined in the DPA and that the company is cooperating. They also discussed Signal Peak, noting that it does not fit into the company's regulated strategy, but they are looking at ways to monetize it. Tierney added that it will continue to be less than 10% of the company's earnings going forward.

Brian Tierney has been undertaking strategic initiatives including decentralization efforts and has seen the potential synergies from the consolidation of certain functions such as HR, engineering, and workforce development. He believes that decision making can be closer to the customers and employees and that this has been seen to work in other companies. He has also reached out to the regulators and employees in Ohio.

Brian Tierney has not yet had a chance to speak with the executives in the state, but the commission there has always been very professional and dedicated to making sure that utilities make the investments that improve reliability and the customer experience. Tierney has committed that the company will take responsibility for the past and do the right thing, but the focus is on the go forward business. He is also discussing updating ROEs in these cases as the data suggests that the company is underearning in all these jurisdictions.

John Tierney was asked to provide an update on the credit ratings of the company and the potential for a credit upgrade. He responded that they had been to all three rating agencies and were hoping for a positive change from Moody's. He also mentioned that S&P was looking for resolution of the DPA and FFO to debt ratios consistently above 12%. Lastly, Shar Pourreza asked for an update on Signal Peak, including hedging in place, and how it ties in with the 6-8% growth rate.

Jon Taylor explains that the company has a plan in place for 2024 and 2025 that accounts for the decline in prices over the past year. He also notes that the company has $7 billion in break base under review, which will lead to strong regulated growth in the distribution businesses. Taylor also mentions that they are managing their O&M increases in 2024, leading to a fairly linear growth going forward. He also addresses Ohio's upcoming case, noting that rate-based costs have increased by 50% since the last case and that they will be messaging around rate impact, with the goal of making it neutral.

Jon Taylor discussed the increase in O&M costs associated with the vegetation management program, A&G costs, and the projected return of 7-7.5% when the case is filed in May. The capital structure is projected to be a 50:50 split of equity and debt, currently at 55% equity. Shar Pourreza asked for more information and Jon Taylor and Brian Tierney provided more context on the increase in O&M, the separations and headcount, and the addition of headcount in the C-suite.

John discussed the plan to reduce O&M costs by 12% year-over-year in 2022, with half of the reduction being due to timing and the other half being due to productivity improvements. This will result in a 15% improvement in O&M costs this year compared to 2022, with half of the savings being reinvested into 2024. Brian then discussed the idea of asking for higher authorized equity ratios, considering the desire to use the bookfield proceeds for equity growth investments and higher equity ratios in the current and past rate case bonds.

Brian Tierney has spoken with Moody's about the new subpoena, which is related to the DPA they have already settled with the Department of Justice. There is no news yet on the FCC investigation or any settlements or quantification of the potential downside.

Brian Tierney and Angie Storozynski discussed the equity layer in Ohio and how it would be calculated in the distribution rate case. They also discussed the performance of the pension funds and the potential gain that could support the earnings. They noted that the asset performance was close to 8% through June, and the discount rate had slightly decreased since year end.

Brian Tierney is answering a question about the ROE discrepancy between the three utilities in Ohio. He states that he doesn't have the information readily available, but he imagines there would be some disparity between the three companies. He also states that typically the companies file in the state at the same time, which is why they provided the 7.3% ROE at the state level. He then goes on to say that there are two steps to a potential consolidation of the utilities in the rate case, the first being the legal entity consolidation.

Brian Tierney states that the FFO to debt should be around 11% for the full year of 2022, due to the pension contribution and rate relief in New Jersey, West Virginia, and Maryland. Jon Taylor adds that there will be a slight increase in O&M due to accelerated work from 2023 to 2022 and other timing items.

Jon Taylor explains that the Office of the Consumer Advocate's investigations need to be kept confidential, which is why the first knowledge of the investigation was the subpoena. Brian Tierney then discusses the importance of continuous improvement initiatives, and how FE Forward is beginning to pay dividends as employees embrace the tools given to them. He adds that the goal is to flatten or even decrease the O&M curve over time as part of an overall continuous improvement program.

Paul Patterson is asking Jon Taylor and Brian Tierney about their discussions with regulators about increased funding for low-income and affordability-challenged ratepayers. Taylor and Tierney state that they are trying to be constructive with their customers and commissions and are trying to put their dollars to work to address those concerns. They have not received a response yet, but they are hopeful that the jurisdictions will be receptive to their proposal.

Brian Tierney and Paul Patterson discuss the OOCIC and whether anything in the DPA would prevent the state from taking action against potential violations of state law. Tierney states that they have taken responsibility for the activities outlined in the DPA and paid the fine for it.

Brian Tierney thanked everyone for participating in the teleconference and expressed appreciation for the interest in the quarter. He indicated that it would be unusual for the same issues to be re-litigated at the federal level. The operator concluded the call and thanked everyone for their participation.

This summary was generated with AI and may contain some inaccuracies.