Q2 2020 FirstEnergy Corp Earnings Call
[music].
Greetings and welcome to the first energy Corp. second quarter 2020 earnings Conference call.
At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
If he would like to ask a question you May press star one on your telephone keypad.
If anyone to require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ms. Irene Purcell, Vice President of Investor Relations. Thank you you may begin.
Thanks, Donna welcome to our second quarter earnings call today, we will make various forward looking statements regarding revenues earnings performance strategies and prospects.
These statements are based on current expectations and are subject to risks and uncertainties.
Factors that could cause actual results could differ materially from those indicated by such statements can be found on be 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 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 our Chief Executive Officer, Chuck Jones, President, Steve Straw, and senior Vice President and Chief Financial Officer, John Taylor. We also have several other executives available to join us for the Q in a session now I'll turn the call over to Chuck.
Thank you Irene and good morning, everyone. Thanks for joining us.
As Irene indicated we have a new lineup of speakers today.
Reflecting the management changes that were put in place in May.
Steve straw in his new role as president of first energy.
I will discuss the operational and regulatory updates on today's call and John Taylor returning to the financial realm in his new role as CFO will review our results.
As we've discussed these changes are the result of extensions secession planning with our board and they thoughtful and proactive plan to ensure we are prepared for a smooth transition and the leadership of our company.
Let's begin by addressing the issue that's been in the news recently.
As you know the Ohio Speaker of the house and for others were arrested on Tuesday on federal criminal charges.
The case involves political activity related to Ohio House Bill six.
Which recognizes the value of the nuclear power plants operated by our former subsidiary first energy solutions.
Now known as energy Harbor.
Also on Tuesday, first Energy Corp, Our first energy services company subsidiary and our political action Committee, where serves subpoenas related to this matter.
We're having discussions with the department of Justice lawyers.
And we'll fully comply with the subpoenas.
I believe that first Sergey acted properly in this matter and we intend to cooperate fully with the investigation to among other things ensure our company and our role in supporting House still six is understood as accurately as possible.
In the meantime, we wanted to share our preliminary perspective on this issue and reinforced the values with which we operate our company.
This is a serious and disturbing situation.
Ethical behavior and upholding the highest standards of conduct our foundational values for the entire first energy family and me personally.
These high standards have fostered the trust of our employees, our customers and the financial community.
We strive to apply these standards in all business dealings, including our participation in the political process.
As you know we have supported keeping Ohio's two nuclear plants and operation.
We believe in supporting the thousands of families farmer first energy families who rely on the jobs those plants provide.
These are good tax paying jobs that we believe are critical to Ohio economic development efforts.
We also believe that is in the best interests of all Ohioans and our nation to maintain these sources of zero carbon clean affordable and reliable energy.
So as we discussed on previous earnings calls, we supported legislative solutions for the nuclear plants, even after we stopped operating them.
We were strong supporters of hospitals, six and oppose the referendum effort to repeal it.
We gave our support because first energy has the obligation to serve 2 million customers in the state of Ohio, including looking out for their long term energy supply, even though we are no longer in a competitive generation business and we're not get a single dollar of the household six funding for those plants.
In addition that passage of hospitals six resulted in a rate decrease for Ohio customers. Despite the nuclear surcharges.
But let me be clear at no time does our support for nuclear plants in Ohio, interfere or supersede our ethical obligations to conduct our business properly.
The facts will become clear as the investigation progresses, and we support bringing the facts forward.
Our leadership team will remain focused on executing our strategy and running our business in the same conscientious manner that you've come to expect.
With that let's talk about the other developments since our last call.
I know the impact of the pandemic and economic slowdown remains on everyone's mind.
Our business strategy remains resilient and we are well positioned to continue managing through the co bid 19 crisis.
We continue making our planned investments and deploying capital across our system.
And we not experienced any significant disruptions in our supply chain or workforce.
To protect the health and safety of our employees their families and our customers we made adjustments to our work procedures early in the pandemic.
And Weve continued refining those practices over the last several months.
Our employees both those in the field and the 7000, who transitioned to working from home in March haven't missed a beat.
Our team has rallied together in the face of this challenge.
We've established a workplace return plan for our employees, who are working from home, but given our strong performance during the past few months, where no rush to get them back to the office.
Likewise, I am extremely ploughed proud of our physical workforce for the great job they've done they have adopted new protocols to keep each other safe while continuing to provide the electricity our customers need.
We continue following all establish precautions for preventing the spread of this virus that includes cleaning and disinfecting measures temperature checks mass and adjustments to reporting locations work schedules and crew sizes.
Im pleased to note that this increased focus on protections from Covidien has extended beyond the virus.
And helped drive a stronger overall safety performance for our company through the first six months of this year.
At first energy safety as an unwavering core value and we will continue provide employees with a safe working environment as we do our part to stop the spread of this disease.
As I said during our last call one of the silver linings of this crisis is the first energy team is coming together to work smarter more creatively and more efficiently than ever before.
Other events in our country, namely the outcry over any quality and social injustice faced by people of color have also brought us together with a deeper sense of urgency and a renewed focus on areas of diversity and inclusion.
This is an issue we had already been working to address within first energy for a number of years and we are actively taking steps across the company to help drive positive changes and promoting quality within our workforce and our communities.
Let's move to our second quarter results yesterday after market close we reported earnings of 57 cents per share on both a gap and operating earnings basis.
This was at the upper end of the earnings guidance, we provided for the quarter.
While John will discuss the drivers in more detail later in the call I'll point out that as we expected our business model and rate structure provided a measure of stability. During this period of pandemic and economic slowdown.
As we discussed in April about two thirds of our base distribution revenues come from residential sales with 28% from commercial customers and about 7% from the industrial sector.
In addition, about 80% of commercial rates and 90% of industrial rates are made up of customer and demand charges.
As a result, what we told you in April has borne out through this quarter, while weather adjusted load dropped by almost 4% system wide compared to the second quarter of 2019, the increase in residential revenues related to the stay at home orders in our service territory more than offset the decreases in the coming.
Actual and industrial sectors.
Well I don't think anyone is in a position to predict what the future might bring in terms of continued reopening or re closing of the economy. We're taking a conservative view of what the next few months might bring.
Nevertheless, we remain very positive that we are well positioned content to continue managing the impact of the pandemic and the economic slowdown and we believe our distribution and transmission investments will continue to provide stable and predictable earnings.
We are affirming our 2020 operating earnings guidance range of $2.40 to 2060 cents per share. We're also affirming our expected CAGR of 6% to 8% through 2021, and 5% to 7% extending through 2023 as well as our plan to issue.
Up to a total of $600 million in equity in 2022 in 2023.
Also for the third quarter of 2020, we are introducing and earnings guidance range of 73 cents to 83 cents per share.
Thank you now I'll turn the call over to Steve straw.
Thanks, Chuck it's good to talk with all of you again today in my new capacity I'll walk through a brief update on some regulatory matters as well as our operations to begin we are pleased that since our last call. The utility commissions of West Virginia in New Jersey, both authorized deferral mechanism.
Zones for incremental coded 19 related costs.
The Pennsylvania to you see authorized the deferral mechanism for uncollectible expenses.
As we told you in April.
Maryland was the first stayed on or service territory to put was such a mechanism in place.
We already had existing riders in Ohio in New Jersey for Uncollectible expenses.
As you know our regulatory calendar is very light through 2023, and we only have a fuel been matters at this time I'll touch on some recent developments.
In New Jersey Inhaled Jay was assigned for the distribution base rate case, we filed in February.
As you'll recall.
We are seeking to recover increasing costs associated with providing safe and reliable electric service for our JCP NL customers, along with recovery of storm costs incurred over the past few years.
We anticipate a procedural scheduled to be issued soon and we remain optimistic that we can reach a favorable settlement with the parties in the case.
Also in New Jersey, we're in settlement discussions with our formula rate filing for GCP Intels transmission assets in December FERC accepted our application to move these episodes into a form.
Forward looking formula rate effective January Onest 2020 subject to refund.
This supports our plan for approximately $175 million in customer focused capital spending.
On the GCP NL transmission system this year.
Moving to the operations from those truck indicated earlier, we continue to execute our plans for 2020.
Even with the significant precautions to keep our employees and customers save we remain on track to make more than $3 billion in customer focused investments to strengthen and modernize our transmission and distribution systems. This year with the goal of enhancing reliability.
Resiliency and security, while improving operational efficiency.
Thank you for your time and now I'll turn it over to John Taylor for the financial review.
Good morning, it's great to speak with you today consistent with our normal practices you will find all reconciliations along with other detailed information about the quarter in the strategic and financial highlights document that's posted to our website.
Now, let's review our results.
As Chuck said, we reported second quarter GAAP and operating earnings of 57 cents, a share which is near the top end of earnings guidance and our distribution business revenues increase compared to the second quarter 2019, as a result of higher residential usage incremental rider revenue in both Ohio, and Pennsylvania and higher whether relate.
Good usage.
This benefit was offset by the absence of the Ohio, DMR revenue, which ended in July 2019, and higher expenses, including non deferred cobot expenses I will describe in a moment.
Total distribution deliveries decreased slightly compared to the second quarter 2019 on both an actual and weather adjusted basis heating degree days were approximately 27% above normal and 58% higher than the second quarter 2019.
Cooling degree days were 2% above normal and 6% higher than the same period last year.
The stay at home orders in our service territories drove an increase in total residential sales of 17.1% or 14.8% on a weather adjusted basis compared to the same period last year.
In the commercial customer class, we saw sales decrease of 14.4% on an actual basis and 14.5% when adjusted for weather compared to the second quarter 2019.
And in our industrial class second quarter load decreased 11.7% compared to the same period last year.
As Chuck indicated earlier, the increased residential volumes more than offset the decrease in cnine load from a revenue perspective for a benefit of four cents per share in the quarter.
Let me spend a moment on our co vid related expenses, which impacted earnings by about four cents per share in the quarter.
As Steve mentioned earlier, all of our utilities are able to defer uncollectible expenses that are incremental to amounts included in base rates as well as other coded related costs in New Jersey, Maryland in West Virginia.
Uncollectible expense increased in the quarter due to the pandemic and reduced earnings by approximately two cents per share. This represents the amount of Uncollectibles currently being collected through base rates and as a result could not be deferred.
The remainder of our increase in Uncollectibles was all deferred for future recovery was no impact on earnings.
While the pandemic is still very fluid we continued to expect that deferral mechanisms, we have in place and our focus on managing on M. spin will mitigate the impact of coded costs and keep us on track to meet our financial commitments.
And our transmission business earnings decreased slightly primarily due to higher net financing costs and the reconciliation of the estimated versus actual true ups of our 2019 formula rates.
We continue to see earnings growth associated with ongoing energizing the future transmission investment program.
And in our corporate segment, our results reflect higher operating expenses compared to the second quarter of 2019.
Before we open up the call to your questions I'd like to discuss a few other financial matters, starting with our pension performance.
As a result of our conservative investment strategy, which we described last quarter. Our pension plan continues to outperform the turbulent market.
Asset returns, we're at 5.7% as of June 30, and as of today, we're around 9% tracking above our 7.5% annual target.
Our investment committee has taken prudent steps to further de risk the plans asset allocation in anticipation of additional market volatility with the goal of preserving the plans year to date asset returns and to protect the plans funded status, which remains unchanged at 77%.
Finally in June we successfully completed the refinancing of $750 million in first energy corp. debt at a blended rate of 2%.
We also completed $175 million debt financing at Potomac Edison and in July we completed a $250 million debt financing at CES.
Our liquidity remains strong at $3.5 billion with our credit facilities in place through December 2022.
In light of the current investigation I want you to know that we are currently compliant with all covenants and can make the necessary representations and warranties as required under our credit facilities to borrow money.
In regard to our financing plan our debt maturities are minimal through 2021 with only $74 million expiring next year and our new money requirements are very manageable with only two transactions remaining in 2020 totaling $250 million and only four transactions in two.
2021 totaling $575 million.
With that I'd like to turn the call back over to Chuck for some closing comments before we begin kuni.
Thanks, John There wasn't a erroneous media report that first energy had held an investor meeting yesterday.
No such meeting happen. So if anyone has filling left out I wanted to make that correction.
In my earlier comments I tried to candidly address the investigation by speaking from the heart and giving you a sense of where we are and what we currently no.
As we move to the Q in a I would really like to let my prepared remarks stand.
Please recognize that I won't be able to speak to any great detail on many of your questions. I. Appreciate your understanding on that and I really hope we can focus that Q on a on the great quarter, We just reported on.
Now, we'll take the first question.
Thank you.
My question. Thank you Mike Thats a question. Please press star one on your.
Hi.
Confirmation probably your line is open question Q. You May proceed start to if you would like to move yourself from the Q.
Our first question today is coming from placement.
Okay Wolfe research. Please go ahead.
Yes, hi, good morning.
Our next Steve I.
I can't help but asking so especially could answer.
The.
Could you maybe give more color on in terms of the payments that are talked about two this fiber one seen for.
How much was that from from FC versus FCS and why did you have any control over Fcs payments as well.
Well first let me take the second half first and as of November sick of 16.
When we essentially made the competitive generation business noncore.
FCS separated fiduciary early financially and operationally from being a part of first energy they put in place and independent board.
And from November 16, I've had no input into any of the decisions. They've made obviously, we've had a lot of discussions between the two companies as it relates to transition shared services and so forth, but in terms of decision making authority mine ended in November of 2016.
On your specific question as I've said I'm not going to get into the details of the case, but I will say this that of the funds that are referenced in the department of Justice affidavit.
First energies share of that is about 25%.
And and in the context of five and a half years of meeting or exceeding every earnings commitment that we've given you every quarter, we do make prudent decisions to spend corporate funds on issues that we believe are important to our customers and shareholders beyond that we intend to provide the details on what we spent how we spent.
To the department of Justice in the coming weeks.
Okay I I'm not sure you can comment on this but can you talk about the reference like phone calls.
Between you and other leadership and ease some of these folks could you talk to that at all is.
No I'm not going to talk to that I talked to a lot of people I tax with a lot of people I'd probably tax more than I talked these days so.
We have to see what they're talking about.
I can tell you this in every meeting.
Every phone call every text message.
That I participate in.
I talked about our obligations to conduct our best business transparently ethically professionally.
I have no worries that I did anything that wasn't that way and.
And we let the merits of our arguments.
Carry the day when we are operating in the political environment.
Hi, just just for color because everyone seems to focus on this.
$60 million of spending just.
How much did the other side spend and the today have some roll similar fiber one cfours on this HP sets.
Steve our share was 25% I'm not going to speak for the other side, you're going have to go talk to them.
Hi, Matt people that oppose the law I'm sorry.
Well the interesting thing about that is it's all in all its all we don't know who's Bennett because it was fat through similar organizations legal fiber one see for organizations, where donors are and I don't know the amount that was spent on the other side, but clearly this was a provocative.
Difficult issue and the state of Ohio, a lot of money was spent on both sides of this issue, particularly after hospitals six was passed.
And it got into the referendum process the process of gathering signatures. The media ads. There was a lot of money spent on both sides and fiber one cfours were used on both sides.
One last quick question Chuck just all right are you going to do is the board going to do some kind of like independent.
Review of all this.
As part of.
The response could you give more color on on that.
Right now.
We're planning to do in internal review of everything involved in the affidavit, which obviously is going to be necessary for us to respond to questions in the subpoena I think the department of Justice review as the most important review that needs to get get going and get completed.
Great. Thank you very much appreciate it.
Thank you. Our next question is coming from Shar Pourreza up to the pipe. Please go ahead.
Hey, good morning, guys.
Hey sharp.
Just on similar topic can you just maybe give us a little bit more granularity on the separation process in 2018, I know, we understand some of the IP and things like payment processing continue to go through company a service company. So that's equal for some time, but it isn't like clear how everything else is actually buy.
For cadence sort of at the manageable level, how much interaction at the corporate senior management have with Fps after the filing.
And where the non back ended fonts is actually split.
Well.
In November of 16, we were providing on the order of $300 million worth of corporate shared services to the generation business.
The process of winding all of that down wet all away to the date, where they emerged from bankruptcy and even beyond that.
I can't tell you the specifics of when each individual functions cease to be performed by the transition Sir shared services agreement and when.
FCS our energy Harbor started to do that on their own I can answer the question of.
Of.
Whether our Anzac executives were involved and the running of FCS or energy Harbor any point after November of 2016, and the answer is no.
We were not involved.
We created corporate separation for a reason we had to get about negotiating.
You know a plan of separation with EFI assets bondholders its creditors.
Theres no way, we could have done that by operating on both sides. So we severed those ties we were not involved in any way in the decisions made by Fcs.
Got it and then several of sort of the individuals charged or longtime lobbyists to interactive to some degree with company a and company a one over the time period and question can you tell us with any kind of specific what what their affiliation was with both a one for example on.
Individual appears to be happy contact with sort of.
Both the enterprises in question.
Let's maybe just elaborate a little bit on the affiliations are those that were charged.
Well, let me say this we do employ lobbyists.
When we do we expect them to act in the same ethical manner that we hold ourselves accountable for.
The lobbyists named in the affidavit and subsequently arrested did not work for first energy on how still six.
And to my knowledge. They have never worked for first energy, who they worked for I'm not sure, but I know they did not work for us.
Got it.
Chuck just one last question.
Just a follow up on Steve's on the fly will one see for what would like the underlining vetting process at the time for making those payments I mean would regulatory affairs. This request them and receive approval freely I guess, how do you assess whether those funds were directed towards the fiber once he would be used for like.
I am quote societal benefits versus political aspirations.
With all due respect sharp I'm going to stay away from that question.
Okay, well, thanks, Chuck for addressing some of this and Thats a tough subject the visibility is really important so thank you very much.
Thank you. Our next question is coming from Julien Dumoulin Smith with Bank of America. Please go ahead.
Hey, good morning team. Thank you for the time.
At risk of delving into the obvious again.
If I could follow on top line of questioning on the services the rate vintage lenders in the historical set up here obviously this historic arrangement.
On the services side lasted for some time as you just.
Articulated with respect to the external affairs piece of this.
How do you think about the decision, making under that services arrangement or any because you can clarify little bit I understand that you. All we're doing a lot of different things, including running external affairs for them, which would presumably include some of these related activity. How do you think about what that would include and.
Running it services the range of what does that mean in terms of their decision making versus zero that you can articulate that a little bit more.
External affairs was one of the areas that they separated very quickly and put in place their own Vice President of external affairs began working with their own law firms began working with and hiring their own lobbyists. We were we were virtually out of the external affairs business for.
Yes, very shortly after November of 2016, so it's about assumption to assume that we were doing that farm we were not.
Right. So it's because what you were running it services ranges for that in other facets for a longer duration, including seemingly.
28.
Specifically in the context of.
External affairs, which would presumably include lobby that that seems to terminate very quickly.
If I got Nick I think you should think about it more in terms of administrative affairs that we were providing them payroll HR services. Some ill financial services IP services those types of things we were providing.
It took a while to figure out how to get that all separated but but this the things that are involved with leading and running a company all separated very early.
And then if I can ask.
When you think about the funding of the final in Q4, I mean, the extent to its that you've done. This in the cost you Doug you contribute to the five when people are even.
Prior to the separation.
Of the company's here I mean that is not necessarily in question here just to be very clear with you. All when you think about the investigation I just want to separate perceptions from perhaps some of the reality is the case you cannot speak to that and I, probably didnt buy one source.
Our bracketed the amount of money.
We spent on hospital six I'm not going to get into the details of how we spend it on this call.
Just last question breed Super quick.
I know you've articulated your own plans about transition of the management team.
And that was obviously.
How do you think about euro.
We're losing new Julien I can't hear your question.
Sorry.
Do you think you'll stay onto dependency of the investigation just to help.
Hello.
Yes.
Okay, well to my knowledge I've never articulated anything that what we've publicly said and I think I've said that I have made no definitive retirement plans and it certainly won't be this year.
And.
And I, absolutely I'm not going to you know.
Not going to not do my part to help restore the reputation of this company to what it duly reserves.
Absolutely.
Well the best good luck.
Thank you Julien.
Thank you. Our next question is coming from Stephen Byrd of Morgan Stanley. Please go ahead.
Hi, good morning.
Hi, Stephen.
I just wanted to.
Talk about fts in general there.
Is there any first energy executives on the border, Yes post 2016.
Excuse me say that again Steven.
Post 2016.
At the asked where there any first energy executives or other percentage you folks.
The board has that yes.
No first energy executives were on the board of FCS.
Okay.
Thank you and then just another cash selected independent directors and I think Donny Schneider, who was the president.
First energy solutions was on the board, but no EFI executives served on that board.
Understood.
Thank you and then just another question on the.
The statement that the company made about this that but you don't.
I believe anything was was done done wrong. There is a fully shortfall between the subpoenas being an issue too.
Well number first energy entities in that statement.
I'm just wondering.
Delicate way to ask it exactly that it's a pretty short time to kind of making assessment to make sure that.
Everyone thought competence and more when it first energy was doing anything role what gives you the confidence that no. One was do anything wrong given the short amount of time between the subpoenas on the statement issue.
I would just say that up so first of all.
Our statement was that we believe that first energy acted properly.
And our dealings on house Bill six.
We can't speak to what happened by anybody other than first energy.
The financial support we provided to house Bill six isn't complicated we know what we did we know why we did it we're looking forward to sharing that with the department of Justice. That's what gives me the confidence to be able to say that we acted properly.
Okay understood and just last question.
Terms of what we've seen some rating agency sort of actions statements recently.
Do you see any need to.
Support your credit position in the immediate term medium term given those statements or do your equity plan sort of stand and you don't see I don't see that need given what we've seen already from the rating agencies on this investigation.
Well first of all we've got plenty of liquidity right now and as you might imagine I spoke to both S&P and Moody's since Tuesday.
We've seen what S&P did.
They put us on a 90 day negative watch when I spoke to on both I'll tell you what I told them I told them that they should not put the ratings integrity of of their ratings on the line for first energy.
That's my job and our company's executive seems job to take care of our reputation and we will do that but also told them that.
Were the same underlying company that existed before Tuesday, we've got an improving balance sheet FFF OTA debt, that's moving into the 12% to 13% range strong earnings CAGR, CAGR and and that's the company that we are in that hasn't changed.
And.
As we work through the process, what the Justice Department, it's going to be the same company when we come out of it from a financial profile definitely Steve anything you want to add to the specifics on the liquidity question.
No Chuck on our liquidity is strong it at 3.5 billion, we have access to it we Tim can make all the reps and warranties under under the facilities and expect to be able to do that moving forward.
Understood. Just last question for me have you had dialogue with with those.
Investigation was a little.
I think just to report on that side of thing.
I have had no dialogue with with a few CEO.
Understood. Thank you very much.
Thank you. Our next question is coming from Paul Patterson of Glenrock Associates. Please go ahead.
Hey, good morning.
Paul.
So as you know there was discussion about repealing H.B. six I'm just thinking other than the decoupling provision.
Is there any.
Any other significant or potential significant impact that would happen if it was repealed and not replaced.
And also sort of likewise in the same area.
Since he has emerged from bankruptcy.
Are there any contingencies or anything that we should think about.
That or obligations to first energy, who to whatever energy Harbor.
Since you guys since its removed since its now out of bankruptcy people element.
All right. So the first question is if house Bill Sixs repealed what what else happens I mentioned in my prepared remarks that house Bill six when it went into law actually resulted in a rate reduction for our customers. Despite the.
Surcharges related to the nuclear plants and that was as a result of some of the.
The previous.
Payments that were being made for customers for renewable energy charges.
It would depend how its repealed how its replaced if at all on what happens with those renewable energy surcharges on the decoupling piece.
Yes, you coupling provisions in house Bill six can have many benefits.
Provides rate certainty for both customers and shareholders until our next base base rate case.
In the case of shareholders it could provide a benefit depending on weather during a normal economic downturn.
But right now as I've said with loads up due to workers being at home from as a result, the pandemic combined with hot weather last month and this month decoupling is actually providing a benefit to the customers. So you know if decoupling goes away. Those are the types of benefits that are going to go away.
Okay, but any funny I went back to you guys other than outside of decoupling I'm just thinking like is there anything.
The decoupling things there, but other than other than that going away is there any financial impact that we should think about potentially.
Again absent decoupling that we should think about with.
Not anything that's significant nor they were going to accommodate within our plan. It's a few pennies a share probably maximum.
That it would benefit us and as I said, if it's not there the real risk is also shared by customers because they'd be whole paying a whole lot higher electric bills this summer than their fan.
Okay, Great and then just with yes post bankruptcy. Your is there any contingency or obligations that you have to them.
No. There's there's no change in our settlement agreement with FCS and its bondholders creditors and all of the other parties. The plan of reorganization was not contingent on hospital six or any other support for the nuclear plants. There is no true ups any other fight financial obligations from EFI to Fcs.
Other than what was in our agreement that was approved by the court.
Okay.
But that agreed so that was.
Okay, I guess, one thing is that.
So we if something happens to F., yes.
Should we be concerned about it having any potential impact on you guys. Since its now emerged from bankruptcy et cetera de Paul what I'm, saying.
Well the last I know they were sitting on 900 plus million of cash I don't.
I can't speak for what's going on out there that was that was a public announcement they made back in March.
I don't I am not sitting here at all worried about.
That part of what used to be part of our company.
Okay.
Appreciate that and then just in general I mean.
Two pages of lots of information has put out there obviously some of it associated with the individuals that are rested I can see some sort of issue with its not clear to me.
But what the actual if any allegations that are actually being made about first energy illegal manner.
Have been being done.
Illegally if you follow me.
Yeah.
I have of course not seem to subpoena what have you, but how should we think about that I guess when we look at night.
I'm going to that my prepared remarks stand on that question.
Okay.
Again, thank so much hang in there.
All right take care.
Thank you. Our next question is coming from Paul Fremont.
Please go ahead.
Hi, Thank you.
Exactly.
I want to start my following up on on Steve Birds question.
Oh that you were faced with the prospect of a potential rating downgrade my standard and Poor's would you alter your.
Equity financing plans to defend the rating or would you allow for the rating.
To go down.
Hi.
I think in the short term, we wouldn't do anything drastic we wouldn't change our plan and we would work to get them to the point, where they're comfortable restoring our rating.
Okay as I said, the underlying financials of this company Havent changed.
Our balance sheet is getting stronger we're moving into the 12% to 13% range.
I'll S&P has a 12% threshold there we're not going to go below that if they were to downgrade us as a result of this news as I've as I've said, that's our job to get this news behind us and when that happens I would expect them to to restore the rating that's appropriate.
Got it.
Well you are aware of the investigation. Prior is the FBR is announcement and press conference. This week or was that the first on the he became aware of the investigation.
I'm not going to comment on that one.
Okay.
Yes, it would be really nicely at about 15 minutes left if we could actually talk about the great quarter, though we had at some point here.
Oh I just have one more question and.
I guess part of the half a day that alleges that there was a payment by you to.
So one of the lobbyists is is that.
Incorrectly.
That you made a payment to that lobbyists.
<unk>.
I would just say this I think that.
The CEO reference and some of that affidavit.
It wasn't may.
I don't know who it was but it was not me and I make I've I've never made a payment directly to a lobbyist in my life.
Our asked any lobbyists to make a payment that want to anyone else on behalf of our company in my life.
Great.
Let me thank you.
Thank you. Our next question is coming from Michael The Peters of Goldman Sachs. Please go ahead.
Hi, guys. Thanks for taking my question I actually want anybody again it.
Thank you Chuck Yeah, I want to dive in that's something that is a bit regulatory related then is Ohio related.
But it's something you deal with every year.
You have your 2019 significantly that's a burning past application out there and the 28 to one I don't think ever about ruled on.
Euro data in 2019, one shows that a little over $300 million of net income at your Ohio distribution utilities.
All right about not quite <unk> billion of rate base, just curious how you're thinking about all the process for resolving the last season pass and be the potential risk it'll be up a rate adoption in Ohio as a result of the seat cash and it did a rate reduction if anything happens.
Maybe a one time kind of refund to customers or would that be an ongoing lowering of rates.
Hey, Michael this is John.
You know as as you look at the seat test.
We filed that back in May at 10.9%.
Return on equity the two biggest drivers and that there were some lower costs and 19 versus 18 lower interest cost and then we had some one off expenses in 2018 now we incurred.
But the bigger impact was that the Ohio utilities paid a dividend up too.
EFI Corp.
Probably a little bit more than they have typically done in the past just because they haven't paid a dividend in quite some time. So that was the key driver in the increase in the return on equity.
No I don't foresee any any issues at the 10.9% were well below the thresholds.
And I think that will be will resolve itself over some period of time I can't remember the regulatory timeframe, maybe I lean if you want to.
Talk through the regulatory timeframe on when that gets approved or how the process works to for the C.
Yes, hi.
Good morning, a timing Nicholson, vice president of rates and regulatory affairs. Thanks, John.
The process as you said each year, we make a filing in may reporting on our prior years earnings consistent with the statutory language with respect to significantly excessive earnings test at that time, we really wait for the public utilities Commission of Ohio to establish a procedural schedule for folks.
To provide comments on that see Trialing, and then make a determination of whether or not we need to move to hearings are not moved to hearings before they make a judgment about whether or not we have significantly excessive everything. They can as you said with a filing a 10.9% where we're not concerned that we have significantly excessive earnings and.
Our whole higher utility.
Okay. So does that mean Ah onez and are there any issues with the 2018 passed since I, maybe wrong, but I didnt get the commission an accident years. She didn't know what are one way or the other on that it just seemed a little unusual for the 18, one to be outstanding scale. When the 19, one got plot.
There is no procedural schedule established as yet for resolving the 2018 seat proceeding. So we await the establishment of a procedural schedule. Then we will act accordingly, but again that 2018, finding with 8.8% and so on a consolidated basis.
Dan No concerns that we have significantly excessive earnings in Ohio in 2018.
Got it thank you guys much appreciated.
Take care Michael.
Thank you. Our next question is coming from Sophie Karp Keybanc capital markets. Please go ahead.
Hi, Good morning, Thank you for taking my question.
Just maybe if you guys should provide a little bit more color on your conversations with rating agencies and I just try to understand a little better what exactly their concerns are.
As they well communicated to you because like you pointed out a fundamentally the business then the wine business is on the right trajectory and remain strong just curious what they what did it they afraid of.
Thank you.
I don't have any more color to provide I pretty much shared everything that I discussed with them.
And.
I think you didn't mean to read what they ROE and call them. If you have more questions.
Right and then second beef I make with my follow up.
You went through a I got to they proceed into establish the decoupling mechanism. So presumably if that was the first you would have to go so that similar profit and again.
And my question is would that menu way trigger a full HIV is in your opinion.
Okay.
There wasn't a full rate review to implement decoupling I would hardly think that there would be one to decoupling like decoupling.
Yes. Thank you.
Okay. Thank you Sophie.
Thank you. Our next question is coming from Durgesh Chopra of Evercore ISI. Please go ahead.
Hey, guys. Good morning, Thank you for taking my question.
Just really quickly first on on Q3 guidance or any comment on what you're doing in terms of.
Over the impact clearly things in Q2.
Then can be trending better than better than where we where you are at least the Q1 call.
Hey, Doug as this is John I think you know if you look at.
The second quarter load on a weather adjusted basis, you were down 4%.
Residential was up 15 commercial was down 15 industrial was down 12.
I think you could probably assume the total.
You know, 4% load reduction off of prior year.
We will be consistent but my sense is the mix will be different we're starting to see residential come down slightly we're starting to see commercial improved slightly in and industrial improve slightly so I think the mix will be.
Different but the load in terms of just total low versus last year will be fairly consistent with what we saw in the second quarter.
With respect to covert related costs, we have the deferral mechanisms on uncollectible expenses and all that's been recorded up to what we haven't base rates. So I don't anticipate any issues there and the other cove. It costs that were incurring in the main theyre not that significant so I don't know.
Paid any impact from from co bid.
In the third quarter.
Understood. Thanks, and then just just quickly going back to a FCS liabilities I just wanted to make sure I understood that clearly so as I recall to the bankruptcy proceeding you have some obligations on specifically nuclear decommissioning and coal ash, if fps where to get in any kind of plans.
The trouble are you, saying that.
That that that you're okay, with where those dress balances are that you are comfortable in in that whole situation I'm just trying to extend that will those obligations be forced energy obligations. The first synergies situation does get into any kind of financial trouble or no.
Durgesh you have you you do not understand correctly, we have no obligations for nuclear decommissioning, we have no direct obligations for any coal ash, we put in place a surety bond as part of our agreement that we negotiated with that for yes.
To ensure the coal ash mitigation happened to properly, but that was that bond is in place and it was part of our separation agreement that was approved by the bankruptcy court and we have no other ongoing financial obligations.
Understood. Thank you. Thank you for that clarification appreciate it.
Our next question coming from.
That's supposed to bank. Please go ahead.
Thanks for taking my question.
And I will say congratulations on a good corridor.
Thanks, I can just a lot if I can just to elaborate on the seat and more specifically you you disclosed the earned or are we have 10.9% in Ohio for 2019, but when I look at the net income of the subsidiaries subtract out the DMR and just do the simple algebra it points to something significantly higher like north of 20.
The present can you just help me reconcile those numbers and why it seems like a pretty big disparity between the 10 nine and what the net income from those subsidiaries looked like.
Yes. So so this is John so I think the though what you see in our Ohio utilities financial statements and what's included in C.
Obviously, we start with what's in the financials, but there are exclusions per the regulations and adjustments that you need to make in order to calculate the seat.
And so.
You know I don't have the list of adjustments on the top my head here in probably wouldn't be a good use a time to go through every single adjustment on the call, but there are certain adjustments that we make not only in the income that reported by the utilities, but also in the equity that's reported by the utilities.
It is a rolling 13 month average equity balance that's used to calculate.
The 10.9% or the 8.8% in the previous year. So are there are some adjustments that we would just need to walk through and we could do that offline if that makes sense.
Could you maybe just give one or two of the biggest still I mean, you're talking about like a doubling of net income Bruce what didn't guide math would imply.
It's Eileen thinking of the adjustments like John we can take this offline, but coming to nine for example, Ohio Addison has Penn power as a subsidiary so we have to adjust and how our out because that is not relevant to the Ohio rate make.
In Formula So there's things like that that are included that are necessary adjustments in order to meet the statutory test.
Okay. Thank you.
Thank you My last question. This morning is coming from Charles Fishman of Morningstar. Please go ahead.
Yeah, Chuck I was stuck on your revenues would be the Brazilian as they were so with respect to call that 19 after the last quarter, but they certainly were this quarter. So I'll give you that add up all around the corner.
And then thank you a Charles and also I saw you quoted and some of the media earlier. This week. Thank you for the vote of confidence.
Okay, and when you're welcome Okay. So since I did that I forget just one quick question on Ohio.
Okay, Okay. The DCR.
Okay can that be opened up as far as nor are we are are we pretty much on autopilot until the SP expires in.
24.
I only and we'll take that thanks, Chuck with respect to TCR in Ohio, I would agree we are on auto pilot through the end of our E. S. P, which is currently in effect through may of 2024.
Okay. Thanks, a lot that's all I have.
Thank you Charles.
Alright, Thank you all.
For your support thanks for at least getting a few questions on the quarter, we'll talk to you again, when it's appropriate take care.
Ladies and gentlemen, thank you your participation. This concludes today's event you may disconnect. Your lines are log off the webcast at this time and have a wonderful day.
[music] mm [noise].
Oh.
Oh.
Oh.
Mm.
[music] mm.