Q4 2019 Earnings Call
[music].
Greetings and welcome to the first energy Corp. fourth quarter 2019 earnings Conference call.
At this time, all participants are in listen only mode a.
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.
It is being recorded.
It is now my pleasure to introduce your host Irene, Brazil, Vice President Investor Relations for first Energy Corp. Thank you Ms. presented you may begin.
Thanks, Doug welcome to our fourth quarter earnings call today, we will make various forward looking statements regarding revenues earnings performance strategies and.
Prospects.
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 such statements can be found on our investor section of our website under the earnings information link and in our SEC filings.
We will also.
Discuss certain non-GAAP financial measures.
Conciliations between GAAP and non-GAAP financial measures can be found on the first energy Investor Relations website, along with the presentation, which supports today's discussion participants in today's call include Chuck Jones, President and Chief Executive Officer, Steve Straw Senior Vice President.
Is it in and Chief Financial Officer, and several other executives in the room, who are available to participate in the Q and a session now I'll turn the call over to check.
Thank you Irene and good morning, everyone. Thanks for joining us.
2019 was another great year, and a step forward for first energy.
Marked by solid execution on initiatives that benefit our customers.
Shareholders communities and our company.
One of the accomplishments that makes us most proud because our record of delivering on the commitments we've made to the financial community.
This morning, we announced 2019.
Non-GAAP earnings of $1.70 cents per share and operating earnings of $2.58 per share, which is at the top end of the guidance range. We provided on our last earnings call.
Mike executing on our customer focus growth strategy, along with some benefits from third quarter weather.
We successfully mitigated the absence of the Ohio distribution modernization writer in the second half of the year.
[noise], we've reached five years of consistently meeting or exceeding the midpoint of the quarterly guidance that we provided.
The culture of execution and ownership that our leadership team as.
Established a first energy as one you can continue to count on as we improve service for our customers and communities and deliver strong results for our shareholders.
Two years ago, we introduced our first long term growth rate projection of 6% to 8% compounded annually from 2018 to 20.
21.
In the first year, we hit it out of the park, our 2019 growth versus our original 2018 guidance was 12%.
Excluding both the Ohio, DMR and weather impacts.
Our culture of strong execution is clearly evident at has gotten us off to a great start on what.
Now as a five year growth plan.
We're looking forward to another solid year end 2020, as we reaffirm our operating earnings guidance of $2.40 to $2 in 60 cents per share.
We continue providing investors with clarity into our long term expectations for earnings growth.
In November we extended the CAGR at a rate of 5% to 7% through 2023.
As we've discussed this projection includes plans to issue a modest amount of equity up to a total of $600 million annually starting in 2022.
When this happens.
It will represent the first infusion of equity into our growth initiative since early 2018.
We will have invested approximately $12 billion in our business during that period.
By successfully executing on our regulated growth strategies, we have driven strong results for investors and 2000.
As a 19, our total shareholder return was 34%, placing our stock within the top quartile of the index.
The TSR over the last two years 2018 in 2019 was 71%, making first energy the number one stock and the idea index.
Over that period.
Over the past several years the rating agencies have acknowledged our transition to a fully regulated company.
It's primarily transmission and distribution operations, resulting in a lower risk profile in 2019, we received numerous ratings upgrades across the first energy.
Family.
As well as at the parent level.
With the November upkeep grade from Fitch, we're making solid progress towards our goal to achieve solid triple B ratings at all three agencies.
Well, we remain focused on making steady improvements to our balance sheet. We believe we are well positioned.
To support our plans for growth, including the extended CAGR and associated equity issuance.
In 2019, we continued executing on our long term customer focus growth plans.
This included an annual capital investment of approximately $3 billion and our transmission and distribution.
Question infrastructure.
Which we expect to continue for the foreseeable future.
And our transmission business, we successfully completed year six of our energizing the future investment program with more than $6.8 billion and investments during that period.
As we reported to you throughout.
2019, our customers in the ATSI footprint are seeing measurable reliability improvements, including a nearly 50% reduction in equipment related transmission outages as there is all the work we're doing to modernize the grid.
As we continue extending the program into our eastern footprint.
We expect those customers to experience similar benefits.
We took another important step in 2019 to continue the expansion of our energizing the future initiative in December FERC accepted our application to move JCP analysis transmission assets into forward looking.
I'm real rates effective January one 2020.
Subject to refund.
With this change nearly 90% of our transmission business is on forward looking formula rates.
The forward looking rate structure in New Jersey supports our plan for approximately $175 million and customer focus.
Capital spending on the JCP, an l. transmission system this year.
On the distribution side of our business last month, we received approval from the public Utilities Commission, Ohio.
Implementing a decoupling mechanism for our residential and commercial customers and the state.
The Commission also.
So remove the requirement that our Ohio companies Folly distribution rate case by 2024.
Decoupling provides rate transparency and stability for these customers, while providing revenue certainty to our Ohio companies.
Rates for 2019, and each year thereafter, we'll be reconciled to 2000.
Isn't 18 baseline revenues and adjusted through a conservation support rider.
There is no impact from the rider on 2019 earnings that adjustment, we recognized in the first quarter of 2020.
Going forward as the writer will be reflected in current period results.
Also in Ohio, our utilities are moving forward, but the $516 million three year grid modernization program. It was approved by the P. USIO in July.
As we've discussed the plan includes modernization projects designed to help reduce the number and duration of power outages and allow our.
Customers to make more informed decisions about their energy usage.
We expect to complete approximately $170 million of grid model work this year.
This initial phase includes deploying 250000 smart meters to allow customers implementing time varying rates and installing more.
600 re closures and capacitors on electric distribution system, which will help automatically isolate problems prevent entire circuit lockouts and quickly resource electric service to customers.
In Pennsylvania, we completed work on the initial phase of our original 350 million dollar.
Long term infrastructure improvement plan in 2019.
Last month, the public utility Commission approved our el tip to spanning 2020 through 2024.
Relative to program includes a 572 million dollar investment across our four Pennsylvania utilities.
To accelerate distribution infrastructure projects in the state.
Improvement plan for each utility complements the work we already perform on our distribution network to reduce the number and duration of outages experienced by our 2 million, Pennsylvania customers.
Investments include replacing older Poles.
Lines infuses, installing new substation equipment network, both Emmanuel covers and Reconfiguring circus.
Approximately $120 million of the work is expected to be completed in 2020 across our Pennsylvania service area with the remainder spent over the next four years.
The cost associated with these service reliability investments are expected to be recovered through the Pennsylvania distribution system improvement charge.
You'll recall that earlier in 2019, the Maryland Public Service Commission approved our rate case, and electric distribution investments surcharge and a five year electric.
Vehicle pilot program.
While the New Jersey border utilities approved our JCP NL reliability plus initiative.
Together these initiatives position us to improve service to our customers as we enable new technologies and the grid of the future.
Later this month, we pant plan to finally distribution rate.
Base rate case in New Jersey.
We will seek to recover increasing costs associated with providing safe and reliable electric service for our customers along with recovery of storm cost incurred over the last few years.
To sum up my discussion of our regulated investments I want to remind you that after the.
One of the JCP and I'll transmission assets to a forward looking formula rate more than 60% of our annual investment will now be in formula rates and distribution riders, making our investment profile very transparent.
Finally, I hope you've taken the time to review our five year strategic plan.
And our corporate responsibility report, which were both publish to our website in the fall.
These reports are an important element of our commitment to provide transparency and it has enhanced engagement with our stakeholders.
They also offer a platform to track progress on our goals and strategies, including SGN.
Initiatives, such as our carbon reduction target.
Average to build a more diverse and exclusive workforce and our ISS governance score.
We're excited to recently earned the Bloomberg gender equality index designation for the second consecutive year and last month, we were named a Forbes list of the best.
For years for diversity.
In addition, we are one of only four companies in our sector to achieve the best possible rating in the ISS governance quality score.
Or refresh the data in our corporate responsibility report when we publish our annual report next month and we intend to update the strategic plan later this year.
To maintain a five year outlook I.
I think you will see that we're continuing to drive first RG toward our mission of becoming a premier forward thinking electric utility that our stakeholders can trust and believe in.
As I mentioned earlier, we are affirming our 2020 operating earnings guidance of $2 and 40.
The $2 in 60 cents per share.
We're also pleased to affirm our expected CAGR of 6% to 8% through 2021.
5% to 7% extending through 2023.
Addition, we are introducing operating earnings guidance of 60 cents to 70 cents per share.
For the first quarter of 2020.
Thank you for your time, we had a great year and we look forward to building on our progress now I'll turn it over to Steve for a review of the fourth quarter in 2019.
Good morning, it's great to speak with you today, all reconciliations and other detailed.
Formation about the quarter are available in the strategic and financial highlights document that as posted to our web site.
We also posted an updated factbook to the web site.
This morning, which includes additional supporting materials related to 2022 in 2023.
The.
Such as our capital in load forecast.
Now, let's review our results.
We reported a fourth quarter GAAP loss of 20 cents per share driven by our annual noncash pension and OPEB mark to market adjustment.
Ill spend a few minutes.
Discussing our pension performance later in my comments.
Adjusting for special items fourth quarter operating earnings were 55 cents per share, which is above the midpoint of the guidance. We provided on our last earnings call.
In the distribution business earnings were flat compared to the fourth quarter 2018.
Team.
I want them expenses were lower this quarter compared to the same period in 2018 and distribution revenues were higher.
This offset the absence of the Ohio, DMR and the impact of more mild temperatures across our footprint.
Total.
Earnings increased due to incremental rider revenue in Ohio, and Pennsylvania, but customer usage decrease compared to the fourth quarter of 2018 bolt on actual and weather adjusted basis.
Heating degree days were 2% below normal and southern.
Percent lower than the fourth quarter of 2018.
Residential sales were down 1.3% on an actual basis compared to the fourth quarter of 2018, but increased slightly on a weather adjusted basis.
In the commercial customer class fourth quarter sales.
<unk> decreased 4.3% on an actual bases and 3.5%.
When adjusted for weather compared to the same period in 2018.
Finally in our industrial Klaus fourth quarter loads decreased 2.4%.
I'll shale.
Well the shale gas sector continues to grow we saw sales decline in every other major sector, including steel automotive coal and chemical.
Looking at our load trends for the full year of 29 team we are encouraged to see.
For the stability in the residential sector, where weve recorded.
Two consecutive years of modest growth in weather adjusted sales.
However, full year 2019 sales to commercial customers were down 2% compared to 2018.
Drivers include weaker economic.
The conditions energy efficiency and distributed generation measures initiated by customers in the education, and food and beverage sectors and lower usage from the real estate sector.
Related to decreases in new construction.
While.
It's widely recognized us has entered into a manufacturing recession.
The impacts of that have flown combined with a couple large plant closings resulted in a 1.7% decrease in deliveries to industrial customers for the year.
Turning back to fourth quarter results for the transmission business.
Earnings increased primarily due to higher rate base at our formula rate companies related to our continued investments in the energizing the future program.
And in our corporate segment fourth quarter results.
Merrily roof reflect lower operating expenses in the absence of a fourth quarter 2018 contribution to the first energy Foundation.
Before we open the call to your questions, let's spend a moment on both a few other.
Financial matters, starting with the pension performance and its impact on our future funding requirements.
In 2019, our pension plan investments produced a return on assets of 20.3% far exceeding our original assumption of five.
7%.
This superior plan performance, coupled with the low discount rate of 3.34% produced two outcomes.
First our 29 team noncash after tax pension and OPEB.
Mark to.
Market adjustment is approximately $480 million, which is at the lower end of the range. We provided in October.
Second.
Our pension plan funding requirements for 2022, and 2023 have decreased significantly.
A year ago, our 2022 funding requirement stood at $382 million.
As a result of the robust plan returns last year.
This is decreased to $159 million.
And for 2023, our funding requirement has.
Decreased to $375 million compared to $455 million at the end of 2018.
As we indicated during the third quarter, the lower interest rate environment has resulted in a higher pension liability.
But our.
The status has improved to 79% compared to 77% at the end of 2018.
As you know, we normally only mark the pension at year end.
But we will need to re measured again when.
Emerges from bankruptcy.
Assuming that they emerge in the first quarter. This year, we anticipate an after tax noncash loss of up to $400 million based on the discount rate and pension performance.
Finally, our corporate liquidity continues to be strong with three.
Point $5 billion.
Undrawn credit facilities and approximately $465 million in cash.
This cash position.
Plus a portion of revolver borrowings.
Will fund the final payment.
Deed.
$153 million.
Upon their emergence.
Please keep in mind 2020 will be a transitional year from a rating agency perspective as this final fts payment will impact our credit metrics.
However, when you exclude this payment our 2020.
Our credit metrics will be compliant with the thresholds established by each of the three rating agencies.
With respect to equity.
We have no incremental needs through 2021, and as we told you at the right we plan to issue up to 600 million.
$1 of equity annually in 2022 in 2023.
The ultimate amount will be determined by a number of factors, including customer load storm activity, whether trends pension performance and rating agency metrics.
Thank you were proud of our results in 2019, and we look forward to continuing our strong progress. This year now let's take your question.
Thank you we will now be conducting a question and answer session. If you'd like to ask your question you May Press star one on your telephone keypad.
I mentioned total indicate your line is.
And the question Q.
Please press star too if you look to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key our first question comes from the line of Greg Gordon with Evercore ISI. Please proceed with your question.
Hey, thanks.
Congrats on a good your guys.
Good morning, Greg.
A couple of questions. The looking at the cash flow disclosure you gave.
There's some changes relative to what the outlook look like.
In the last back book, but I guess, when I am pocket it looks like the.
Her changes just.
The delay in the cash payment to the Fps creditors, and a decision to pay them out and cash rather than take on that tax note associated with the prior settlement. So can you just walk through.
No. The former is just timing, but the decision making on the ladder and why you see that has value accretive.
Okay, great get some.
Steve Staab. So the way you explained it is exactly what what happened.
We were planning to make the payment in 2019, assuming and SCS emergence at that point, but.
Obviously that didn't happen, it's going to happen here sometime in February at which point in time, we will fund the cash payment of 225 million and we will also pay.
What we were previously thinking would be issued as a tax note. We will also pay that tax no in cash and so from an economics perspective. It just makes more sense for us to use cash on hand to to pay off that tax node now rather than have to deal with it by the end of 2022 in.
Refinance it again at that point.
And I'll, just say the size that point that that means we won't be answering questions about EFI EPS for the next five years.
[music].
No we're all happy about that.
Two two more questions the yeah as it pertains to just.
Obviously, a lot of moving parts. When you you think about the 22 and beyond equity.
Potential equity needs, you've set up to 600 million.
But one of the pieces that looks like it's gotten better as pension performance means future pension contributions are down by a little over 300 million. So.
All things.
Equal does that mean that your equity needs are down by potentially up to 300 million.
Well I would say this we put a range in there that allows for flexibility for lots of things to change between now and then the range of zero to 600, including the drip is a range that we expect to Stan.
I don't think it should be extracted that it will be 600 million every single year, but it will be within that range, depending on where we're at when we get to that point.
All right that's a fair not answer my final question is.
Yes, I know this has no direct economic impact on your.
Definitely has an impact on your customers.
What do you think the Ohio governments response is going to be to the FERC decision on.
On the mobile rules with regard to.
The capacity market is it possible that the state of Ohio, we'll consider leaving PJM through fr.
I would say that the state of Ohio has already kind of talked about their disappointment with the PJM market.
And their intention to use the next year or so to look at energy policy for the state the last time they looked at.
Energy policy. The state was 20 years ago 1999, when Senate Bill three deregulated. The state I think there's a lot of disappointment that some of the goals. They thought would be achieved through that never materialized. I think there were some unintended consequences that happened that they they didnt expect to happen.
And so I think they're going to fully look at everything.
From how.
The utilities interact with the public utilities Commission to.
How we ensure a long term secure supply of generation for Ohio customers to how we get back to us the Ohio.
In a state that has.
Energy surplus as opposed to a shortfall I think theres a lot of things are going to look at but beyond that.
But our intention is is we'll be at the table, helping where they want help providing our guidance where they want guidance and.
During our views, where we feel strongly about certain things should go a certain way.
Do you feel strongly about our one way or the other.
I don't I'm not in the generation business anymore. So.
But I feel strongly that we need to come up with a long term solution for customers.
That ensures they have adequate fuels secure.
Cost effective generation not just right now and I mean, it's no my views on these markets has not changed a one year capacity signal three years out and the next hourly short run marginal cost.
No there's no way to do this business for the long haul and they are failing and so something needs to be done whether Ohio decides to step up and do something is up to them, but I do not think the market as constructed today is going to provide the best long term outcome for my customers.
Thank you.
Our next question comes from the line of profit.
With Citigroup. Please proceed with your question.
Thanks, So much high guys.
The problem.
Hi, So maybe just firstly clarifying something more specific on page 11.
You have regulatory charges for the fourth quarter and the distribution business, which is being adding which is adding back about 15 cents of earnings to get to more operating earnings.
What specifically does that 15 cents relate to.
Yes, Praful. This is Jason loss, asking chief accounting officer that is related to a.
Quarter that reallocate some transmission expenses across our utilities and as you may recall in Ohio.
At the time in the past and not have the ability to pass those onto customers. So it ends up being actually a refund than a credit back to allow companies and since in the past we were excluding that from our non-GAAP operating earnings when you receive.
See that credit we consistently also excluded it from our non-GAAP operating earnings.
Hi launch that's helpful. Thank you.
And then in terms of.
Longer term growth the 21 to 23 earnings profile based on the growth that you've talked about looks like a four and a half.
Percent earnings growth if I just wanted to use the map for the last two years.
I'm, assuming some of that is obviously a slower rate based growth and then the equity need can you just walk through or help us understand what kind of rate based growth you're assuming for the last two years in the current forecast and like how much dilution do you expect was strong.
Based on EPS.
Well I'll I'll answer this.
CAGR that we've given you for their next five years as a CAGR that we expect to hit.
Which is 6% to 8% for the first three and five to seven after that I'll, let Jason try to walk you through the rate base accounting.
That gets to that but as I've told you. Many times when you look at our company from the outside in trying to line up what you look at with the regulatory accounting that goes on because it's no longer just the same simple math it used to be is difficult, but we'll have Jason try.
Yeah.
Yes, a profit if you look at the back book that we released this morning, we actually do show our expected rate base growth both separately for the regulated distribution and regulated transmission through 2023 broken down by each state and you will see that in 2022 in 2023, there is still growth, but that growth does slow down a little that.
Okay fair enough, thanks would add little bit more and discuss that and then just finally on the equity needs point.
I understand that clearly the pension has helped so that should help reduce the equity needs a little bit.
Wanted to understand in terms of banas balancing other goal is right around leverage holdco debt.
What are the key guide boasted.
You should be thinking about as you think about the equity Upto 600, what could help bring it down upon from pension what could help what could kind of lead to pushing it up just a few of those guide post will be helpful.
Well, obviously, one thing that could help bring it down as if we eventually see some.
Some reasonable.
Growth throughout our footprint, just a little bit of low growth can have a huge impact.
Hi, we give a range for a reason I mean, what the performance of the pension plan can continue to affect what's needed. There you know, it's it's and I wasn't trying to Dodge Gregs question I can't say.
Here today and tell you how much equity were going to recommend we issue and 2020 to 20 324.
It's not going to be more than $600 million I can confidently say that.
Got it really appreciate it guys. Thank you.
Our next question comes from the line of Julien.
And Smith with Bank of America Merrill Lynch. Please proceed with your question.
Hey, good morning to.
Morning Julian.
Hey, so perhaps just a pick up on a slightly different state and angle.
Can you talk a little bit more about new Jersey and.
The energy Masterplan here and specifically, how do you see opportunities emerging from that and or some of your peers in their respective clean energy filings in parallel I'm thinking am higher otherwise and then as well can you touch on some of the commentary on the MP with respect to reduction or meaningful reduction in gas and.
And obviously you guys aren't in gas, but Conversely, how do you think about the electrification implications that seem to be pretty clear in the Mt. As well, so perhaps such holistically on the on the New Jersey business, given everything going on if you don't mind.
Okay well.
There's a lot in that question.
I was just over in New Jersey last week I met with three of the Beep you Commissioners I met with the Governor and has policy team.
The afternoon after he rolled out the energy Master plan, So had a lot of opportunity to talk with him and his team in particular about how I think our.
Company can can help him be successful with it.
I think there are opportunities for us to help particularly.
In the electric vehicle area, if the state decides to embrace utilities investing and.
Building out a robust charging network throughout the state.
Yes.
I think ill advanced metering is something the state has to decide what their policy is on but we've got a lot of experience now in Pennsylvania with nearly 2 million meters, there and we're going to be rolling out a quarter of a million in Ohio. So what I offered is were will come to the table and help them understand.
The pros and cons because there are both that we see to help them make an informed decision on that.
Very honest with them that I have no intention to get into investing in offshore wind.
Thats not something I see us taking on at this point in time.
Talked with him about.
Mission and I know the the VP President made some comments about transmission, so I might as well just address those here because I know I'm going to get a question.
His comments were specific to that net worth transmission service charges in the Bgs auction for one company and that company was.
Let us by the way I saw what happened in the market with our stock yesterday. After his comments became public I think the market should be smart enough to figure out that that involved one company should also be smart enough to figure out as he said at the end that FERC sets transmission rates not the VP.
Ooh and you're not going to set different ones for new Jersey than they do everywhere else.
It should also be smarter to figure out there what we've told you all along is 90% of our transmission capital investment is in states other than New Jersey.
And 90% of all of our $3 billion of.
That is in states other than new Jersey, but what I talked to the governor and his team about is the fact that.
Our transmission plan.
If we work together can be complementary to what he's trying to do with his energy Master plan and actually enabling of what he wants to do with his energy Master plan.
And they were very receptive to that.
And we agreed to continue to work together to figure out how to make that happen. So.
All in all I think first energy that the best placed its ever been in New Jersey in terms of our relationships in terms of the things that we're doing in.
Terms of.
US being trusted advisors to the Governor's office on his energy Master plan. There was nothing in that energy Master plan that scares me in anyway, but there are pieces and parts I think we can help more on and there's pieces and parts that we don't want to be part of.
But just to clarify on that.
I'd just be incremental capital I know you guys talked about a very specific and committed equity capital plan and financing plan forecast period, but I. Just also hear your comments about.
Helping the state in New Jersey here too.
The reason, we have a range and this capex plan that we've communicated is so.
So that we have the ability to have flexibility to move it around state to state transmission distribution.
I'm not going to sit here and tell you that we're going to add incremental capital beyond the range that we've given you.
And the range that we are giving unit is is it's got a couple control rods and it.
One is our customers' ability to pay and constant awareness of the fact that without load growth. These are going to be rate increases for customers and we have to be careful with that and the other control rod be in the balance sheet and managing the amount of equity that we are ultimately going to need to do to.
Paying our credit where we want it and get to that goal would be in triple B rated with all three agencies. So we're going to use this range that we have to satisfy what we're going to execute from a work plan in all five states I am not planning to change that range in the near term.
Alright, great well that's.
The block thank you.
Thanks Julien.
Our next question comes from the line of Michael Lapidus with Goldman Sachs. Please proceed with your question.
Hey, guys. Thanks for taking my question Chuck.
You only really owned general regulated generation in one state West Virginia, just curious.
How you're thinking about how has the potential for kind of changes to the generation fleet. The composition of the generation fleet, maybe especially since the state kind of sitting on the Marcellus shale, whether whether the economics makes sense for the company in the customer to add a little bit more gas fired generation.
The regulated makes there.
And then obviously is there a need for for kind of an uptake in either renewable or even kind of smart gay read on the distribution side Capex and in West Virginia.
Well you make a good straight man because you can help me reemphasize the point.
That one of the things that I think differentiates us from many others in our sector is we are a transmission and distribution company by and large by four states that are deregulated. So we don't own generation, there and that that creates a risk profile thats very low risk we don't have.
The risk that go along with owning massive fleets of generating plants, particularly coal and coal waste disposal sites and so forth in west Virginia, the process as a real simple we're going to file a.
Integrated resource plan and West Virginia by the end of this year.
We'll share our.
He is with West, Virginia about where we see their capacity needs being some thoughts on how to how to meet that but those decisions are going to be made in conjunction with the state of West Virginia and.
I think that that there are opportunities to embrace what's going on with the.
Well development and their capitalizing on it with a lot of industrial growth in that state in terms of collection and compressing and so forth whether they want to capitalize in terms of generation sources that remains to be seen.
And.
I don't want to speak for the state of West, Virginia, but up until now.
At least.
Been real welcoming to renewables, there, but from a first synergy perspective.
As we get separation.
From this whole Fcs issue and put that behind us.
I think investment and renewable generation in our regulated.
Context is something that we need to be thinking about adding to our our portfolio.
Deregulated in any fashion, we worked so hard to get to this company I. Just said is at TNT company low risk.
No exposure to markets, that's where we want to stay any in generation we.
Right invest in is going to be earning a regulated rate of return just like those two plants in west Virginia do.
Got it one other question totally unrelated just curious can you what's embedded in guidance in terms of kind of lithium growth rates across the distribution business and also at the.
Corporate level.
What's embedded in our guidance is yes, keeping all of them flat.
Over that period so.
And and so what I've challenged the team to do is to get more efficient at how we deliver service to customers or in the process of rolling out.
And innovation Center at first energy, we've got a number of employees, who who have earned black belts in innovation engineering, we're going to put them all into one group, we're going to use that group to help drive innovation throughout this company as a way to make us more efficient and offset the annual we give.
Three and this year at 3.5% wage increase on the average to our employees.
Half of which ends up on M.
We've got to find a way to offset but what's in the guidance period is flat on m. throughout that period.
Got it starting off of 2019 basis or starting off 2018 base.
Was there anything unusual in 2019.
Starting off of the that when we finished EFI tomorrow and finished dealing with our corporate costs.
Which by the way, our TNT costs or bottom decile.
As far as I went down and our corporate costs.
Our bottom quartile and in terms of low being good in both cases. So we've got this company very lean and we expect to keep it that way throughout this period.
Got it thank you Chuck much appreciated.
Thank you.
Our next question comes from the line of Charles Fishman with Morningstar Research. Please.
Proceed with your question.
Yes.
Uh huh.
90%. So your transmission now run that one slide.
Showed was a formula maybe just walk forward looking.
And.
What gets you to that last 10% or is it a process similar to what.
We saw in New Jersey.
And your.
And what's the timing on that.
Well, it's it's what's left that is not forward looking formula rates as the former Allegheny system.
And.
And yes, the process would be to either eventually merge that into one of our existing transcos or form.
And other Transco.
But the timing is what is is such that we will do that when it makes the best sense in terms of there will be a crossover point, where the investment returns.
Our returns to shareholders in a forward looking formula rate than it does in a stated rate right now the stated.
Great is better for all of you.
Okay.
Then second question.
When we last clocked in November.
You haven't finished the planning processes, one to hold off on values through.
23.
As you wrapped up that process will.
Your mind was there anything that.
No no surprises probably too strong of a word but maybe it was a little different than you thought.
As you wrapped up that process.
No not at all.
I think it's very difficult to predict the future five years out.
So a lot of what we had to get comfortable within that planning process is what what's the world going to look like not today, but what's the we're gonna look like in 2023.
What's going to happen with inflation, what's going to happen with growth et cetera, et cetera, and bracket those types of things one thing I can tell you I am.
Confident in.
Is that.
We're going to execute on the plan that we put out to this company and if it's 3.2 billion or 3.3 billion EUR 2.9 billion, it's going to deliver the results that we intend to deliver and by getting to the point.
Where more than 60% of all of it is in formula rates, it's very transparent and easy to calculate.
And where we need to have rate cases, we're going to have them just as I said, we're going to file a rate case, probably this month in new Jersey to get that Trued up recover some storm costs that we've deferred up until now.
So our our ability to execute on rate cases, we've demonstrated we can do that too, but it was just really more getting comfortable with it.
A range of outcomes that could happen between now and them to get comfortable with the CAGR and get comfortable with the equity assumptions both.
Okay. That's all.
Thank you.
And the other thing I've added and I said this repeatedly.
Im not going to tell you something until I know the engineering me is still in there we got to have the plan and we got to have the numbers work and I know, we can execute on it which is why I was probably a little slow.
Okay and get into a five year CAGR, but.
But thats also what results in five straight years now of meeting or exceeding every single quarter that we've given you guidance.
Our next question comes from the line of Andrew Weisel with Scotiabank. Please proceed with your question.
Hey, good morning, everybody.
Good morning.
First one I just want a follow up on the New Jersey questions earlier, I believe excuse me in the Capex outlook do those forecast includes some level of spending related to things that were covered by the energy Master plan like energy efficiency. He these am I.
And we'll those buckets be part of the upcoming JCP now rate case filing or would they come later in separate composite compliance filings or something like that.
Now they don't include anything for that right now it's about 175 million in transmission you know what the IP is we're going to round out the first.
Round of IP and at some point in time, hopefully you will see IP to just like you saw l. tip to in Pennsylvania, and when that comes again Thats why we have a range of capex.
So that we have the ability to have flexibility from state to state and TD.
Okay, so that would be upside to the current numbers if there were to be spending on that.
Might be upside in new Jersey, but it would probably come away from somewhere else. I mean, you can count on the capital plan being what I've told you. It is and we're going to get the CAGR that I've told you, we're going to get but the pieces and parts of.
It may move around from state to state.
Got it Thats helpful. Then last this is just kind of a small one but in Pennsylvania you congratulations on getting the LTV to approved in full my question is on the DS I see rider the benchmark or are we was just reduced by 10 basis points I believe yesterday.
Ted 945 does that apply to your subsidiaries and if so could you give any sort of earnings sensitivity I know that's just came out yesterday. So it didnt give you a whole lot of time, but.
Any thoughts on that.
Hi, liens on top of it.
Good morning, sizing Nicholson and vice President of rates and regulatory affairs. Thank you Chuck.
Yes, we are aware that thats PPA PC reduce the benchmark for the ROI in Pennsylvania State and 9.4 or five.
Where that benchmark is you really relate to our desk calculation and for utilities that have not had a base rate case.
In the last two years they substitute that.
Our only benchmark number into their calculation when they calculate their desk revenues so for our for distribution utilities in Pennsylvania going forward will use in higher return calculation.
Our non equity of 9.4 or five.
Rather than the 9.55 that we've been using in the past, which really the 10 basis points across those this calculation is.
It is immaterial change to the revenues that will collect under those riders. The second thing that that hourly benchmark is used for is really a customer protection to say to the extent that the utilities.
Have earnings in excess of that benchmark that they report in their quarterly earnings reports.
They exceed that benchmark. They will then have to turn off their desk recovery until such time is their earnings fall below that so we've looked at those numbers overnight, we're confident that it doesn't change our outlook for dust collection during.
In the planning Horizon, I would put a caveat on it to say, we do have a settlement pending before the Pennsylvania public Utilities Commission to increase the cap we have in Penn power. So.
Assuming that's approved we expect to be able to continue to collect this across all of our utilities throughout the planning period.
Okay. Great. That's very helpful. You mentioned Penn power is there a potential for Penn power rate case sometime soon.
I don't think we're expecting a Penn power rate case over the planning horizon and largely that's because we were able to reach a settlement with the other parties in Pennsylvania, that's pending before the commission.
To allow us to collect this revenue up to 7.5% of our base distribution rates in Penn power aware for all the other utilities its capped at 5% so that really allowed us to cover that additional investment through the desk rider and eliminated the need for base rate case.
That's great. So so took.
And is it fair to say that JCP and al might be the only rate case through 2023.
I'd say, that's that's a fair way to look at where we're at today.
I would just stay again, it's I mean, I agree with chaff put a caveat on it that we do have an obligation in 2023 to file an additional base rate case in the state of.
Now.
Right. Good reminder, okay. Thank you so much.
Our next question comes from the line of Sophie Karp with Keybanc capital markets. Please proceed with your question.
Hi, good morning.
Good morning.
I've a question on load.
So you guys, we mentioned that as one of those factors that can help offset equity needs will impact your planning in the way.
In despite sort of a strong overall economy. He doesn't seem like we've seen a lot of that they know high Oh, yes elsewhere, maybe new territories could you discuss that a little bit and maybe give us some.
Sense of what do you have seen on the ground and what can change that.
Actually positive flow both Inc.
So for you. This is Steve straw and we're conservative in terms of load growth that we do put into our plan and right now I believe we will see.
More of what we've seen in 29 team.
And that is basically flat load growth to us to slightly declining.
Load growth, but I also just looking at 29 seeing it for a moment, we were down 1.1% and that was slightly lower than our guide.
Once which was <unk>, 0.6%.
So when we estimate that were pretty good at estimating where we're going to land, we didnt Miss it significantly.
And in terms of sensitivities.
The 1% decline that we saw in 2019.
Versus the guidance really impacts earnings.
Only about 2% and that's really driven by the residential sector, our commercial and industrial.
Loads are really in rates are fixed or having demand rates, which are not as impactful.
So right now we do see the manufacturing.
Recession, continuing in 2020 before we start to see recovery, we're hopeful that start to see that recovery in mid year or little bit later, so right now I would just say look forward to flat low growth within our territory, we don't really see that changing.
Currently.
The only thing that I would add that I think at in the back half of this planning period that we're talking about.
That that could be.
Significant is this shell cracker plant in Western Pennsylvania.
And empirically as economists look at the world.
It's difficult to factor that end, but I'd just drove over there for a meeting last week, it's due to come online, but end of 2021, so it's a year and a half away.
It won't be a lot of load itself, because they're going to self generate with the methane that's a waste product of the of the.
Taking process.
But the industrial load that's going to pop up and has already popping up you're starting to see cranes in the air on other sites I think can have an opportunity to jumpstart this economy.
In.
Eastern Ohio, Western Pennsylvania, Northern West Virginia.
And we are now starting to see construction progress on the cracker plant in Ohio too so.
The combination of both of those I think and can be something that could be a good surprise and it's difficult to factor into the numbers. Yes, I would also Ed. So for you Lastly, we are encouraged by.
Facing the two consecutive years of residential load growth, albeit modest we look at that is being very positive for some of the reasons I mentioned earlier.
So I don't want to be too much of a downer at all.
Thank you.
Look I mean, you're in northeastern Ohio, I mean.
We've got forward investing over a $1 billion into plants in northeastern Ohio, GM adjusted announced the state of the Art Advisory manufacturing facility in Ohio. The former Lordstown plant is being re purpose to into an electric vehicle.
Light duty medium duty truck.
Facilities so.
When those things all get done the job market and the economy is going to benefit from all that so in the back end of this planning period.
Optimistic that we can see some growth.
Got it thank you.
Okay I see.
No other questions in the queue. So thank you again.
For your support really over the last five years since I've been in this job and I think we intend to have a.
Another year in 2020, just like we've had the.
Last five years.
Expect to be fully regulated company here by the end of this month with FCS behind Us and and then just move on from there. Thank you.
Ladies and gentlemen, this does concludes todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.