Q3 2020 FirstEnergy Corp Earnings Call
[music].
Greetings and welcome to <unk> first Energy Corporation third quarter 2020, <unk> earnings Conference call.
At this time, all participants are gonna listen only mode. 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 is being recorded I would add is that my pleasure to introduce your host.
I mean, Brazil, Vice President and Investor Relations for first energy club humans, because all you may begin good morning, everyone and welcome to our third 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 risk and uncertainties.
Factors that could cause actual results to differ materially from those indicated by such statements.
Can be found on the investors section of our website under the earnings information link and in our SEC filings.
I would also call your attention to a new risk factor that is included in the 8-K, we filed this morning.
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 Web site, along with the presentation, which supports today's discussion.
Participants in today's call include our executive director, Chris Pappas.
Acting Chief Executive Officer, 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 and a session.
For those of you who do not know Chris He has been an independent member of the first energy Board since 2011.
And he retired in 2019, as President and Chief Executive Officer of Trinseo at a.
I'll turn it over now to Chris.
Thank you Irene and good morning, everyone.
I appreciate the opportunity to participate in todays call.
I'm going to start out by discussing the leadership transition the company announced last week my role with the company and the boards governance efforts.
First I will note that the D.O.J. investigation prompted a number of shareholder and customer law suits.
And we're also responding to a subpoena we received from the FCC on September 2nd.
Related to the investigation into first energy by the FCC Division of enforcement.
We are cooperating with the D.O.J. and the FCC.
During the course of our internal review related to the ongoing government investigation regarding house Bill six.
The Independent review committee of the board determines the three executives violated certain first energy policies and its code of conduct.
When we determined that employee conduct is inconsistent with our policy in values.
No matter, how senior the individual we.
We have a duty to take action.
And that is what we have done here.
As a result first energy announced on Thursday that CEO, Chuck Jones, along with Dennis Chuck Senior Vice President of product development marketing and branding and.
And Mike Dowling <unk> senior Vice President of external affairs.
Were all terminated effective immediately.
Concurrently Steve straw, who many of you know from his role as his first Energy's President and previously CFO was appointed acting CEO.
Steve has the experience credibility and the support of the board.
In this role.
Steve is a highly respected executive with deep knowledge of first Energy's business.
Significant operational experience.
He became president in May 2020, as part of the Companys ordinary course succession planning process.
In his various leadership roles at the company, including his recent tenure as CFO and President Steve.
Steve is supported the execution of first Energy's long term customer focused growth strategy and demonstrated his commitment to delivering value to all stakeholders, including employees customers communities and shareholders.
I look forward to working closely with him in my new role as executive director.
In this role I remain an independent member of the Board and we'll also work closely with Don Michigan, Our non executive Chairman.
To assist management teams execution of strategic initiatives to engage with the companys external stakeholders, including the investment community as appropriate.
And to support the development of enhanced controls and governance policies and procedures.
The board has already conducting a full review its governance and oversight processes to look for areas of improvement going forward.
This is a serious matter for our board and for first energy management.
In order to address this in a timely and effective way. The board has formed a new sub committee of our audit committee to quickly assess and implement potential changes as appropriate in the company's compliance program.
This effort will be led by independent Board member Leslie Turner.
Let's leave retired as senior Vice President.
General Counsel and corporate Secretary of the Hershey Company.
She joined our board in 2018 and is a member of the audit and compensation committees.
This new sub committee will work with management internal audit and also engaged outside expertise for help and best practices.
As I previously mentioned, we have and will continue to cooperate with the Geo Jay and FCC investigations we.
We have also reached out to companies key stakeholders, including the ratings agencies banks regulators legislators and Union leadership.
We believe the actions the board has taken represent an additional step towards addressing these matters.
And enables first Energy's management to continue to focus on running the business day to day.
First energy embarked on a strategy several years ago to become a fully regulated company and grow through the substantial opportunities available in both the distribution and transmission businesses.
That strategy will continue.
It is working.
And the foundational drivers are intact.
The first energy organization at large has been delivering excellent results over the last few years.
And that continues with the strong performance year to date and the company's expectations for the full year.
As we look ahead the board has full confidence in Steve.
And the rest of the team's ability to ensure a seamless transition and to continue to execute the company's strategy.
With that I will now I'll turn it over to Steve.
Thanks, Chris and good morning, everyone well.
While I would have preferred to have assumed my new role under different circumstances.
Agree with Chris that the actions taken by our board of Directors last week, we're absolutely necessary.
And our an additional step towards addressing this matter.
The management team is committed.
Through working with the board to.
To assess and implement potential changes as appropriate with the company's compliance program.
We take this as a serious and important matter and we will begin to address this immediately.
In my 36 years with the company, we have faced challenges and changes and we have always emerged stronger and even more dedicated to our mission.
Our management team remains focused on keeping each other safe, providing reliable service to our customers and executing our growth initiatives.
I am confident that we will continue to carry out. This plan finished the year strong and enter 2021 with momentum.
I look forward to working with our team to achieve this.
With that let me transition to a brief update on our operations and recent regulatory activity.
Then John will review, our results and other financial matters.
While the pandemic continues to impact our work protocols, our customers' lives in the economy I am extremely proud of the hard work and Resiliencies.
Our employees have demonstrated throughout this crisis.
We remain on pace to complete more than $3 billion in customer focused investments across our system. This year.
And our business model and rate structure continue to provide stability.
This morning, we reported third quarter operating earnings of 84 cents per share a penny above the top end of our guidance range.
Those results primarily reflect the successful implementation of our regulated growth strategies and favorable weather together.
Together with the continuation of the pandemic driven load trends, we noted on our second quarter call.
As John will discuss in more detail the earnings impact of higher weather adjusted sales from residential customers more than offset the lower usage in our commercial and industrial sectors.
Based on our strong performance year to date and the expectations for the next couple of months.
We are reaffirming our guidance range of $2.40 to $2.60 per share and currently expect to be near the top end of that range.
If decoupling is part of a house Bill six repeal we would be closer to the two dollar in 50 cent.
Per share midpoint.
We have updated our funds from operations and free cash flow forecast for 2020 to reflect the impacts of higher storm costs of approximately $145 million and higher costs associated with the pandemic, including the uncollectibles of approximately 120.
Million dollars, most of which are deferred for future recovery.
Although the events of this past week and the government investigations create additional uncertainty we are reaffirming our expected CAGR of 6% to 8% through 2021, and 5% to 7% extending through 2023.
Along with our plan to issue up to $600 million in the equity annually in 2022 and 20 to 23.
With that said we are mindful that the current situation may present additional challenges to meet this objective.
John will address some tactics, we are taking to address uncertainty created by the investigation.
Now, let's turn to regulatory matters.
In New Jersey, JCP, NL filed and Am I implementation plan with the board of public utilities in late August if approved we would begin installing 1.15 million smart meters and related infrastructure across our New Jersey service territory.
Over a three year period, beginning in 2023.
Also at JCP until last week, we were very pleased that the BPU approved our settlement in the distribution base rate case as well as the sale of GCP smells interest in the yards Creek pumped storage hydro generation facility.
The settlement provides recovery.
For increasing costs associated with providing safe and reliable electric service for our JCP, an old customers along with the recovery of storm costs incurred over the past few years.
It includes a $94 million annual increase in distribution revenues based on in our ROE of 9.6%.
The settlement also includes an agreement to delay the implementation of the rate increase until November Onest 2021 to assist our customers during the pandemic.
Prior to then the rate increase will be offset through amortization of regulatory liabilities totaling approximately $86 million beginning January onest.
The parties also agreed that the net gains from the sale of GCP and Els interest in yards Creek estimated at $110 million will be used to reduce the regulatory asset.
For previously deferred storm cost.
We expect to close the yards pre transaction within the next few months.
Finally to continue our commitment to customer focused transmission investments, we filed an application with FERC last week to move transmission assets in the Allegheny power system zone to forward looking formula rates. This.
This includes transmission assets in the West Penn Power territory in Pennsylvania, the manpower territory in West, Virginia, and the Potomac Edison territory in West, Virginia, Maryland, and Virginia.
We are requesting an effective date of January Onest 2021.
In addition, we created a new Standalone transmission company Keystone Appalachian transmission company or Catco to accommodate the new construction in this footprint.
We filed last week to establish a forward looking formula transmission rate for Catco and over the next several months, we plan to make the necessary filings to transfer certain transmission assets from West Penn power and Potomac Edison to the new affiliate requesting an effective.
To date of January Onest 2022.
In closing, while I find a disappointing that we have arrived at this point I have great confidence not only in the management team, but in the full support of the board of directors and together, we're committed to lead this company out of it.
I'd like to reiterate that our regulated growth strategy is strong it is working and it is moving forward.
And I am committed to working with management and the board to address changes to our compliance program.
Thank you for your time and now I'll turn it over to John Taylor for the financial review.
Thanks, Steve and good morning, everyone as always all reconciliations and other detailed information about the quarter can be found in the strategic and financial highlights document on our website.
While we traditionally file the 10-Q in connection with our call. We don't expect to file at this week as we continue our review and closing procedures to ensure we provide appropriate disclosure.
Also as we noted in Friday's 8-K, the violations of certain company policy and code of conduct by the terminated executives has caused us to reevaluate our controls framework and that could lead to identifying one or more material weaknesses. However, based on our review of these issues, we do not expect any impact of price.
Our period financial results.
This morning, we reported third quarter GAAP and operating earnings of 84 cents per share as Steve noted operating earnings were a penny above the top end of our earnings guidance range, largely reflecting the ongoing success of our regulated growth strategy as well as benefits from weather.
In the distribution business revenues increased compared to the third quarter of 2019 as a result of higher weather adjusted residential usage and incremental rider revenue driven by our capital investment programs in Ohio and Pennsylvania.
Total distribution deliveries decreased compared to the third quarter of 2019.
With an actual and weather adjusted basis.
Cooling degree days were approximately 21% above normal and relatively flat to the third quarter of 2019 talk.
Total residential sales increased 5.3% on a weather adjusted basis compared to the same period last year as many people continue to work from home and spend more time at home due to the pandemic.
In the commercial customer class sales decreased 5.5% on a weather adjusted basis compared to the third quarter of 2019.
And in our industrial class third quarter LOE decreased to 6.3% compared to the same period last year consistent with the trends we've seen for the past 12 months, the only sector showing growth in our footprint with shale gas.
As we discussed last quarter, the increase residential volumes more than offset the decrease in commercial and industrial load from a revenue perspective.
In our transmission business earnings were flat compared to the third quarter of 2019 as the earnings growth associated with our energizing the future transmission initiative were offset by higher net financing costs and the absence of a tax benefit recognized in the third quarter of 2019.
In our corporate segment, our results primarily reflect higher tax benefits compared to the third quarter of 2019.
In the fourth quarter, we will make our annual pension and OPEB Mark to market adjustment based on the asset returns through September thirtyth, and a discount rate ranging from 2.7% to 3%, we estimate that adjustment to be between an after tax loss of $330 million to a gain of $40 million as a reminder, this.
Is a noncash item year to date, our return on assets was 9.2% versus our assumption of 7.5% and our funded status remains at 77%.
As Chris mentioned, we proactively reached out to the three rating agencies last week to discuss within the leadership transition and our path forward.
While we believe the fundamentals of our business remains strong we understand our certain management and governance factors that the agencies consider and the risk assessment, which ultimately impact the credit ratings.
The rating agencies have taken numerous actions and we have provided all the details in the investor Factbook.
At the court remains at investment grade with both Fitch and Moody's and S&P, while we are not investment grade at the Corp, or first energy transmission all other subsidiaries remain investment grade at their issue level ratings.
We will continue to maintain our open dialogue with each of the agencies and remain in close contact with them as we chart our path forward.
Finally, I will take a few minutes to review other financial considerations and tactical changes, we are making to address the uncertainty created by the investigations.
First from a liquidity perspective, I'll remind you that we continue to have access to $3.5 billion of credit facilities committed through December 2022.
These facilities are substantially undrawn with only a $150 million borrowed and we remain in compliance with all covenants and can make the necessary representations and warranties to bar new funds.
In addition, we expect our holding company debt to remain around 35% of total adjusted debt and we have no plans to increase debt at the first energy Holdco.
To further refine expectations for 2021, I want to make a few comments about the dividend and reaffirm our dividend policy two years ago at.
We announced a targeted payout ratio of 55% to 65% of our operating earnings in alignment with that policy. Our board raised the quarterly payout by two cents per share for dividends paid in 2019, and then by one cents per share for those paid in 2020.
Given our current yield of approximately 5%, we expect to hold our quarterly dividend at 39 cents per share or $1.56 per share on an annualized basis for next year.
This would represent a 59% payout ratio to our CAGR midpoint for 2021 now.
And we'll continue to review the dividend on a quarterly basis.
From a tactical perspective, our 2021 based on EM is flat to 2020 levels and we will soon begin developing plans for reductions to operating expenses if necessary.
With respect to our overall capital programs for 2021, our Capex programs will be at the $3 billion level, and we will consider reductions if necessary.
Equity continues to be a part of our overall financing plan as Steve said, we are reaffirming our plan to issue up to $600 million in equity annually in 2022 and 2023.
And we will take the necessary actions financially to weather this uncertainty and put the company in the best position possible.
We believe these steps are prudent to provide flexibility as we face uncertainty in the near term.
Before we begin today I will turn it back to Chris for a few more comments.
As we move towards question. His answers. This morning, I want to summarize a few points the investigation and matters related to it are ongoing and therefore, we will not answer any questions related to this other than to refer to our earlier prepared remarks.
I know you have many questions we are not going to provide more information at this time.
The board and management view this as a serious and important matter.
And our newly appointed Subcommittee of the Audit Committee led by Leslie Turner as well as management and internal audit will address this immediately.
First energy strategy is working and delivering results as shown in our third quarter 2020 results and our outlook going forward, but matters related to the investigation will add uncertainties to the future financial results of the company.
The tactical financial changes that John described earlier, our prudent to provide flexibility as we face uncertainty in the near term.
And now we'll open to questions and answers.
Thank you as we would like to have good question. Please press star one on your telephone keypad a confirmation tele indicate your line. This is a question you May press star two if you would like to remove your questions in the queue.
And using speaker equipment, it may be necessary to pickup you had said before pressing the sorry.
Our first question is.
From Shar Pourreza with Guggenheim Partners. Please proceed.
Hey, good morning, guys good.
Good morning sharp.
Hi couple of questions here.
Does the board intend on publicly releasing any of its findings while the federal investigations are going on and as video Jay given you any sort of timeline on a potential resolution.
Hi, This is Chris Pappas.
Chris.
Hi, no to both is the short answer.
The investigation is ongoing and we will not be providing updates during that period and.
And we have no certainty on the timeline at this point from the DLJ.
Got it.
And then maybe just if you could just from a balance sheet perspective, just touch on how you would expect to finance a potential fine or penalty I know you have some equity question with your $1.2 billion and guidance for 22, and 23 and potentially higher corporate tax rates could help improve the cash flows. So what is sort of the balance sheet.
Capacity look like if you want into a scenario, where there could be a deferred prosecution agreement.
Hey, sorry. This is John I think Thats why.
That's why we're taking the steps that we're taking now to provide.
Additional balance sheet flexibility.
When we cut back Capex, when we think about operating expense reductions.
That doesnt necessarily Max out your balance sheet over the next two years to fund that growth in fact that improves your balance sheet. So thats why were taking the steps.
That we're taking to just kind of make sure that we address this uncertainty because we don't know where we're going to be in a year or so with the department of justice and whether or not theres going to be a finer felicity. So were just slowing back on growth for the near term. We can take additional actions if necessary and I think that will provide plenty of balance sheet flexibility.
Perfect and then just lastly for me.
Do you guys have any sort of current expectations around the state of HPC mix and doesn't sound like it but could that sort of maybe impact your ability to provide 21 guidance and are you getting any sort of indication that the PCL could maybe speak to reopen the current ESP, which runs through 24.
Sure. This is Steve the way we're viewing that is.
You know the SP and the distribution rate for use in effect right now will continue through may of 2024.
The way I look at it if the P. USIO would approach the company for some other different reason to open. It we would follow the lead of the regulator that that's really the way I would view it.
As for household six were following along the progress and commentary.
Movements around the potential repeal of it but right now we're just following along with the state legislature to see what they would like to do next so I lean anything yet.
Sure. This is John I would I would say that it depends on how if its a repeal and replace how they put in the decoupling mechanism. If they put it in at all so I think there is a lot of unknowns, but if you remember going back to the 2018 and then how we implement a decoupling this year.
It wasn't but about a four or five cent helped to our earnings profile in the current year. So I think you got to keep that in consideration. When you think about these types of things.
Got it thanks.
Steve I wish it was under better circumstances, but really good luck on your transition I think you're going to get great. So thanks guys.
Sure. Thank you very much.
Our next question is from Stephen Byrd with Morgan Stanley. Please proceed.
Hi, good morning.
Good morning, Stephen.
And then just a process question.
Has your internal committee been sharing offline forms and documents with.
The DJ and FCC as you've been kind of going through your process.
We've been cooperating with both agencies Stephen yes.
The company has been bought spring both agencies right.
And Chris are you confident that no. Other first energy officers our employees are in violation us at the policies are the code of conduct.
The investigation Stephen is still ongoing.
And be premature to make any comments on that till we get to a more conclusive state.
Understood.
Have you received any other subpoena as I think you mentioned the scepter.
September's FCC subpoena have you received any other subpoenas from any federal or state entities recently.
No.
Understood.
And have you uncover any other violations that extend beyond the purview of the Yep investigation for example involving other states or interactions with newco.
It's really premature to comment again, Steven the dismissals of the employees that shoe from that you heard about last week are related to violations of the companys policies and code of conduct and that's really all we can say at this time.
Yes, I understand I know it sir.
Challenging for you to be able to to address some of these questions.
And do you have a sense over what timeframe youll be sort of coming to your internal conclusions in terms the investigation or is it or is the target unclear.
I think the timeline is unclear what we can say is that the subcommittee that we formed.
Under the leadership of Leslie Turner will begin their work immediately on.
On working on our own internal.
Policies in compliance and we'd expect some read out from them as the company reports first quarter earnings now thats not around the investigation to be clear that surround working on improved.
Improving our policies around compliance Thats, a parallel process of course the investigation.
Understood last one from me just on the queue. John you mentioned potential for material weaknesses are there any particular sort of since.
The financial implications finance seen implications or or other implications. If you do end up concluding that there are material weaknesses.
No I wouldn't I wouldn't think so like I said based on everything that we've looked at even if we conclude there is a material weakness there wasn't any.
Issue with the previous financial results that we reported to our Investor community. So no I wouldn't expect any issues like that.
Understood I'll, let others ask questions. Thank you.
Our next question is from Julien Dumoulin Smith with Bank of America. Please proceed.
Hey, good morning, Tim Thanks for the time I Hope you all hanging in there.
I wanted to pick it up on the earnings side of the equation here. If we can keep more exposed the ability the puts and takes here in terms of the balance sheet latitude as well as the earnings trajectory outlook silver.
So if I hear you right for instance, sounds like there's some cost levers one Q it sounds like the decoupling piece could be about a dime.
Due to 60 give or take and then third I am curious.
With that there is anything else in terms of potential impact. If you can address it from a credit ratings gains on future financing assumptions are baked into the plan as well.
If there is anything else.
Yes, Julian that's that's a lot there let me let me see if I can kind of address it.
No.
We're taking these steps to preserve balance sheet flexibility. That's I mean, we're we're in an uncertain period of time.
This thing has to play out over a period of months maybe into next year and we think it's just prudent to take these steps to cut back on some capex to maybe look at some operating expense reductions. So he can add some flexibility if something bad goes our way.
I would say the decoupling mechanism is only about four or five cents not the 10 cents that you mentioned, so I think in the Grand scheme of things that would be something that we would overcome any year.
Yes, Julien this is Steve I would just add in my prepared comments, we talked about reaffirming our business plan and it's very strong and it's very robust.
You know in terms of confirming our CAGR for EPS through 2023, our plan.
Remains unchanged at this point I think what you're also seeing with our most recent quarter result, you're seeing the resiliency of their business plan that we've talked about before so I think that speaks very strongly for our company and for the potential.
Next few.
Well the potential next year to have some level of uncertainty here.
We're not only sticking with that base business plan, but as we announced today, we are moving the Allegheny assets into formulaic rates from a transmission standpoint and at that point. Once that's concluded you're going to see our transmission system.
100% on formulaic rates moving ahead. So once again it takes the strength that we have in our transmission program at an even deepens. It more so thats the perspective that I would bring to it and Julien. This is John I think you had a question on just financing costs.
As you think about the ratings that we have today, we are still investment grade with all the rating agencies, except for S&P and Thats at first energy Holdco and then first energy transmission.
The majority of our financings over the next few years are going to be at our subsidiaries, which have investment grade credit rating. So I don't see that being too much of a challenge. We do have some holding company debt that comes due in 22 and 23, but we'll be able to manage through that.
Got it.
Thats, what I was thinking I was trying to reconcile those those moving pieces here.
If I can clarify even further when you think about the preserving balance sheet flexibility to be that update here in the next.
Couple of quarters as far as.
Split to target and what that means from an earnings perspective going forward.
Yes.
Somewhat fluid, but curious on how you would prepare to delineate it right I think we'll have more next early next year when we talk about the fourth quarter results.
Got it.
All right excellent well best of luck. Thank you very much.
Thanks Julien.
Our next question is from Angie Storozynski with Seaport Global Please proceed.
Thank you. So I mean, I know, we're trying to look forward, but I'm still.
Losses from the information that we were provided during the.
Second quarter earnings call.
And I know that I could no longer with the company but.
Yes.
I mean can you help us.
Well the reconcile both Lakeland.
The.
Let me go credibility among investors.
Yes, I'll leave it open ended like that.
Well Angie, it's Chris I think the only thing we can say is.
The in internal.
Investigation.
The board and outside counsel.
Has led to the outcomes that you saw Friday.
And Thats really the only kind of comment we can make about.
About that passed and that the.
Dismissals of the executives mentioned were for violations of company policy and code of conduct.
Okay, and then could you share with us if you have the Apollo.
Your asphalt regulators and then what kind of feedback you have received following this this this news about management changes.
Angie its Steve we did do a comprehensive outreach not only to.
The state legislators.
The regulators state and local officials throughout our footprint. So I think if I was to characterize the outreach and the feedback they were appreciative of our very prompt.
For two to talk to them and communicate the news there.
They were obviously various levels of surprise and shock. If you will of the actions that the board took in a very decisive manner, but they understood. Once we talk them through that in general just like we are today.
And there were concerns expressed right. It was a significant change it happened very quickly and really this is where we really have to lean on the relationships. We have with the regulatory bodies. We've worked very very hard over decades, and Lisa decades, I've been with the company.
To ensure that we have great two way communication then given take on various issues in.
You know this is where you rely on those relationships.
Yes, as acting CEO im going to really make it a large part of my role to ensure that we can continue to communicate very closely with them listen to concerns respond appropriately in and move ahead, it's like any other relationship in life. It's it's two way communication.
Asian, and I need to instill in promote that level of trust in first energy in and I'm prepared to do that.
Thank you and just last question given that the stock is trading and given that you have equity needs, even even without that.
This investigational any potential penalties that may come up on that.
Would you consider.
Hey that asset sales or.
Hi, Nelson below us so.
Start up equity.
Angie This is John I think we're taking these actions.
Internally with Capex reductions opex reductions to give us flexibility incur.
Including issuing equity.
So I think those are the things that we're focused on.
First and then we'll see where we are sometime down the road.
Great. Thank you.
Our next question is from Jeremy Tonet with JP Morgan. Please proceed.
Hi, good morning.
Good morning, Jeremy.
I just want to follow up on some of the earlier conversation with Ohio, and if Ohio Appeals are replaces house Bill six legislation Q.
Can you walk us through the exact impact there you guide to the top end.
With no changes, but to the midpoint of decoupling is repealed sounds like half the drag is retroactive full year decoupling removal, but what were the other kind of moving pieces. There. If you cannot explain if you could clarify a bit there that'd be great.
So I think you would go back the assumption would be we would go back to the rate construct that we had in 2018. So you would remove the decoupling mechanism, but then you would reestablish your.
Our energy efficiency rider under the rider DSE, so that would be the cost structure. So it would be about a five cents.
Hit to earnings.
And then you would no longer going forward, depending on how they repealed and replaced if decoupling is no longer part of the rate structure going forward than you would have those that mechanism that rider DSC in place going forward.
Got it so I think you said five cents there just trying to figure out I think you pointed to the top end of the guide with each be six and the midpoint without being kind of a 10 cents delta. There. So just wondering what the remainder of that Delta is my guess that drives that high end versus the midpoint.
Well, maybe I'll say it this way.
Right now, we think we're going to be near the top end.
If we hit the five cents for the house Bill six is repealed with the decoupling will be around the midpoint.
Right.
Got it Okay and then just one last one if I could appreciate this a bit of an awkward.
Question, but just wondering Chris well Stephen is now the acting CEO what are the next steps forward here I'm the CEO process.
I think it's a great question, Jeremy happy to answer.
Steve has been.
Clearly the candidate in our board normal succession planning process for the CEO of the company.
Thats evidenced by his movement through the company, including.
His prior role as president.
Due to the circumstances, what we experienced last week the board decided to move.
Steve immediately entity acting CEO role.
And we would envision continuing on our succession plan, which is to.
At the right time in the near future have him assume the role as CEO, So as Nicview and the Board's view run a normal transition to CEO with the person we always had in mind.
That's very helpful context, thank you.
Our next question is from the placement with Wolfe Research. Please proceed.
Hi, good morning.
Just wanted to make sure I clarify the the tactical changes relative to your.
The one tactical changes you kept the dividend flat yes.
And then I guess the other tactical changes are.
Potential cost cuts and Capex cuts.
If those latter ones are made would that.
Change your plan meaningfully or is it still kind of within the construct of our.
The the the plan as reaffirmed.
Steve This is John we would do that all in the construct of the the plan we've been talking about.
Okay. That's helpful.
And the.
I know you mentioned.
There is no that if your credit ratings at the at the parent.
Our.
I guess, both S&P and Moody's downgraded below investment grade Theres, no need for any no triggers or any other related impacts.
Now please.
Okay.
And then on on the credit line facility. If you had these material weaknesses in your Q.
That doesn't that doesn't affect those facilities at all.
Let me, let me, let Steve stock ticker.
Again.
Hi, Hey, this is Steve stop I'm, the treasurer of the company. So any event that there would be any violations.
Any covenants under our credit facility. We would then at that point in time have to go request the waiver from our Bank group.
Okay.
Okay. This is Irene I believe you said that Moody's downgraded us Moody's affirmed our rating.
I guess I meant at both the yes, no I'm aware that were pulled agencies.
Yes.
Is there.
So so Steve if both rating agencies downgraded us again, which means S&P rating would go from double B plus down to double B and all of our utilities at that point would go down to non investment grade and then the Moody's credit rating would go from BA three to be a one our financing costs would obviously be a little more expensive.
The Holdco step up provisions that we have with our bonds at the holding company, which applies to about 4 billion of them.
Obviously become a little more expense expensive because they would increase by about 50 basis points in terms of cost.
Our credit facilities would become a little more expensive that would increase strong pricing by 25 basis points and we would have to post potentially up to about $40 million of collateral it's all manageable.
Thats very late yeah.
I do want to say that some.
We have experienced.
You know at the double B plus credit rating right now with respect to S&P S&P had us at that rating from 2010 through most of 2018 and so you know we are experienced that at that current credit rating right now and I wouldn't expect any issues accessing the capital markets if the ratings.
Were lower simply it would just be more it would just be a little more expensive for us.
Okay, Great. That's very helpful, but it's not like the liquidity type events is just a little bit higher financing costs.
That is correct I mean, we're a fully regulated company now so you know Fps is no longer a part of first energy and back then when it was a part of us collateral requirements would have been much higher.
Great.
I'll leave it at that thank you appreciate it.
Our next question is from.
Yeah, Keith Cobra with Evercore ISI. Please proceed.
Hey, good morning, Thanks for taking my question.
I have one clarification and then one quick follow up just on the internal investigation.
Is that now over I appreciate Theres, a supplement you look at sort of governance practices and improved and perhaps but just in general investigation now over at this point.
No. It is still ongoing as are the other investigations.
Thanks for that clarification, and then just maybe one for for John John Weve had done a discussion with investors around.
Regulatory our OE versus GAAP, our OE, specifically in Ohio, maybe just could you help us where you are with that the difference is what drives the differences, there and where where is regulatory versus GAAP are we perhaps at the end of Q3 or.
Maybe even early in the year.
Well, there's obviously several differences between.
How we report our financial results for gap and how we report them from from from a regulatory perspective.
For instance from a regulatory perspective in Ohio, you excluded the DMR.
When when that was in place.
There's other things that from a regulatory perspective that you exclude for instance in Ohio, you only get pension service cost isn't as part of your rates. So the non service piece.
Is excluded.
On the regulatory which is typically a credit for us.
So there are items like that that you know.
Really drive the difference between what we report on a GAAP basis versus what we report on a regulatory basis.
Got it and then maybe can you comment and perhaps this is a follow up follow up with our own but can you comment where you are in terms of their regulatory or not are we.
Hi.
Well, we filed the well.
Hi, Io seat.
For 2019, and we were 10.9%, 10.8% somewhere around there so.
So that's kind of where we are.
Okay, great. Thanks, guys much appreciate the time.
Our next question is from Paul Patterson with Glenrock Associates. Please proceed.
Hey, good morning.
Good morning, Paul.
So just.
Just to sort of clarify your it sounds like we may not get any because it really planning on disclosing anything.
Until after the DRG investigation is complete and public is that the way to think about this.
Yes.
Okay.
And then with respect to Catco.
Could you remind us I think thats good beginning in 2022 or that's what you guys have planned could you remind us what the what the earnings impact would be of that.
Well I think I think we are going to file for rates effective one 121, and then we would move those assets into that transmission company one 122.
If you look at the rate base, its $750 million somewhere around there so.
You know you would at first I don't think its going to be as meaningful just because you're on a stated rate today and you're going to transition to a formula rate but.
But it is an area where investment is needed it's an opportunity to improve.
The customer reliability and those service territories, and I think you'll start to see some capex going in there and then it could be meaningful.
John Nicholson, Vice President of rate and regulatory affairs I would just add that once those forward looking for new rates go into effect in 25 to one.
That revenue a religious about 1% higher than it would stay right in that range.
Yes, and just to place it in the broader context.
Right now with.
That really represents perhaps 10% of our transmission footprint. So it's not going to be large or significant but once again. It completes the strategy that we have for transmission that is to move off the stated rates in the Allegheny footprint and go to Formula.
And as we proceeded JCP NL, we'll be successful there were confident and this will be the last progression. Yes. Interestingly interestingly. This is the last sort of large PJM.
Very good right.
Right.
After the transition.
Okay, but just oh I apologize for being a little off on this but I think you guys are asking for 11.35% or are we.
And you guys plan on on getting that done.
Or are we being effective for $750 million worth of assets you're.
Beginning in 2021.
And.
I understand that correctly I'm, just sort of wondering.
What what the what the are we I know its different jurisdictions and stuff but.
This was the order we in general that you guys have in those jurisdictions right now.
Roughly speaking.
It's I mean and again.
Our only was part of a black box settlement.
Analysts for the state rates many years there is no stated.
David are only what we did file for forward looking formula rate to eight narrowly at 10.85.
A clean air for RTL participation rate.
11.35%, yes.
Yes.
Okay, we'll follow up afterwards, thank you so much.
Thank you.
Our next question is from Mike Lapidus with Goldman Sachs. Please proceed.
Thank you for taking my question first one is probably for John What's is I'm trying to think about the accounting of the JV MPL rate paid can you walk us through the earnings impact of the rate increase versus the cash flow impact I understand they are probably different he had been right that the amortization of the rag.
Gaps and Reg liability [laughter] does the rate increase not really impact earnings next year, but they're not really impact cash flow next year or does it not impact both.
It does not impact cash flow next year, but it will impact earnings next year, because you'll implement the base rate increase beginning January of 21, but that will be offset by amortization of regulatory liabilities. So customers will not see the increase.
But first energy will receive the earnings.
And Ken and I would just add to that that we will pick up to last November and December.
Hi, C repatriating cash.
Yes, they are and the company and the condition of the south is able to retain.
It's Chris gain this is Bob.
She said earlier $110 million expected in place.
Got it and if I think about it.
The revenue increased just over $90 million.
Or there are costs that go up with it that will be all set on the income statement or what that 94 million drop to the bottom line.
Yeah. If you remember part of our request was to collect deferred storm costs. They adjusted.
Storm costs that are included in the base rate. So there are cost associated with that rate increase.
Got it includes just give us.
An inkling of how much of that then that drops to the bottom line.
I think it's four to five cents a share.
Meaning that's the benefit from the 94 million a rate increase that's correct.
Thank you John much appreciated I'll watch.
And maybe a few question little thoughts at all about generation transformation, meaning transforming the fleet in West Virginia going forward just curious given.
That's the one place young generation and it's obviously a coal heavy fleet West Virginia, just curious given declining costs.
Gas fired generation as well as obviously solar and wind.
How are you thinking about what your fleet looks like three to five years formaldehyde.
Well right now were working towards publishing or not publishing, but submitting our IR P for west Virginia. So within that document we're going to articulate some of our moving forward thoughts for West Virginia.
You are right. It is a coal fleet there for us and we're very cognizant of our responsibilities to run those plants. However, as you look forward.
There is an opportunity for example to be able to install solar within the state right now and we're also considering that so more on that later were due to submit that filing in December of this year correct I agree.
Got it. Thank you guys much appreciated guys. Thanks for taking my questions.
[laughter].
Our next question is from Paul Fremont with Mizuho Securities. Please proceed.
Bye.
Hi, Thanks, I guess first question I have just to get a better understanding of the of the 5% to 7% growth through 2023.
Which I thought had been in part at least.
A link to your rate base growth.
In terms of if you end up cutting back on Capex you have last rate base would you be making that up then through a one m. reduction or or can you just explain how you would be able to maintain the five to seven.
I think theres a lot of different moving pieces cost containment would obviously be one.
Thing that we could do and we already have seen some some favorable impacts in our forecast from the favorable returns we had last year in our pension.
So thats going to flow through if you think about where interest rates are today versus where we where they were when we confirmed our CAGR last year borrowing cost are down we had a very successful.
Bond deal at EFI Corp earlier.
Earlier this year so.
So they are all factors that are driving our confidence in that number now.
There is some uncertainty that we have to deal with and that's why we're taking these steps to kind of provide for some flexibility.
If something goes doesn't go our way, but but.
Just because we're cutting back capex $250 million is not going to throw us off track to hit those results.
And just as a reminder, that's $250 million roughly on a budget within our plan that we were counting on to be 3 billion to 3.25 billion. So once again it's.
It's prudent to do the planning right now and.
And it's.
A small portion of a much larger pie that helps fuel our transmission earnings power and by the way just to emphasize it you know as we've said before very important for customers to we're seeing significant reliability improvements within those investments so.
So it's it's doable right customers are seeing benefit and it is a very good earnings engine for the company appropriately.
[noise] [laughter].
Next question would be on the second quarter call you'd indicated that you would not seek to alter a potential rating agency downgraded to sub investment grade because you expect it to be indicated as part of the investigation.
Are you now comfortable to remain sub investment grade.
With at least one rating agency.
No no we're not comfortable with that I mean, but at the end of the day, it's related to governance issues and.
And I think that's why we're taking the steps that we're doing to him address.
The governance matters, the compliance matters with less lease subcommittee and that'll be part of what they focus on.
[noise] Oh, no expectation would then be once you put additional governance measures into place.
Rating agency would then reverse the downgrade action.
I mean, we would have to talk to them about the steps that we're taking the findings we.
We found.
The recommendations I think it's going to take some time for us to work through this but.
Our focus is going to be improving on those types of matters. So we can get the rating back to investment grade.
So you would not take action to issue equity to try and bring the rating backup.
No.
Great Uh huh.
Okay. Thanks, Paul.
Our next question is from Charles Fishman with Morningstar. Please proceed.
Thank you on.
With Catco.
As I recall with with ATSI and maybe that's part of the energizing the future.
There was this an incredible opportunity for investment because reverted batsmen really with.
Good things going on at out yes, or.
The balance sheet and everything else.
10 years ago is there that same opportunity.
Co once we get beyond 2023 in assuming the forward.
The making goes into effect.
Would you envision.
That's meant accelerating.
That transmission Coke.
I think there is significant opportunity in Catco and that's exactly why we made our filing I think it also provides additional flexibility for our company to move let's just say that 3 billion dollar transmission spend around our system. So once again, while under a.
Stated rate, we believed our strategy would be better suited to go after investments in other formulaic rates around our system. When you look at the reliability of the transmission system in general we found greater needs at ATSI and meat rather.
Van pursuing anything in Allegheny in the early going of the energizing the future program.
Very difficult to believe but we're entering I believe year seven of that program. So we've seen reliability improvements in both of the other transmission companies. We're certainly not done yet I believe we have a pipeline of 20 years' worth of work that you know.
We've a fixed a $20 billion number two in terms of potential additional transmission upgrades. So to your earlier point, there's what I would call a pent up need there and were responsibly addressing it.
That's helpful. Thank you that's all I have thank you.
Okay well.
Well, thank you very much.
Yes, Hi. Please proceed.
Okay. Thank you very much I just wanted to close out the call by thanking you for your time and attention today and the interest in our company.
And our.
I know that we did our very best today to provide you a fulsome update on recent key events. We also look forward to talking and meeting with each of you in the virtual E conference coming up so look forward to that very much.
I would also just close with a message of safety.
The pandemic that is still.
Very much alive in this country as a company we are working very hard to keep our employees safe and our customers save I just wish all the best to each one of you is as we maintain.
The right safety protocols, while we're working through it so all the best to you and be safe. Thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day.