Q4 2020 FirstEnergy Corp Earnings Call
[music].
Greetings and welcome to the Firstenergy Corp, 's fourth quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Irene <unk>, Vice President of Investor Relations for Firstenergy Corp. Thank you Ms. <unk> you may begin.
Thank you welcome to our fourth quarter and full year earnings call. Today, we will make various forward looking statements regarding revenues earnings performance strategies prospects and other matters. These statements are based on current expectations and are subject to risks and uncertainties factors that could cause actual.
Our results to differ materially from those indicated by these statements can be found on the investors 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 the presentation that support today's discussion and other detailed information about the quarter can be found in the strategic and financial highlights document on the first energy Investor Relations website.
Participants on today's call include our President and acting Chief Executive Officer, Steve draw.
Senior Vice President and Chief Financial Officer, John Taylor.
And our executive director, an independent Board member, Chris Pappas, we.
We also have several other executives available to join us for the Q&A session now I'll turn the call over to Steve.
Thank you Irene and good morning, everyone before I get into our results I wanted to kick off the call with a few words on a critical area of focus for Firstenergy.
Taking appropriate actions to address our recent challenges and fostering a strong culture of compliance and ethics and integrity.
We are deeply committed to creating a culture in which compliance is endemic and second nature, and where our leaders prioritize and encourage open and transparent communications with all of our stakeholders.
This focus is absolutely essential for our success as an organization.
Our commitment starts at the top and extends throughout the organization.
We are working to ensure that every leader is actively engaged in setting the proper tone and creating an environment, where not only are words, but our actions align with our core values and behaviors.
We're building a world class compliance function to underpin this effort, including bringing on Theone Park is our new senior Vice President and Chief Legal Officer in January.
John is the right person to step into this role at this time and he will be instrumental in driving this cultural shift.
We will also be appointing a chief ethics, and compliance officer, who will manage a dedicated team of compliance professionals and enhance our efforts to improve our compliance function by shifting from a decentralized to a more centralized model.
In addition, we'll be designating compliance ambassadors throughout the company to act as boots on the ground, ensuring the entire organization understands the critical importance of compliance and what it means for each individual.
We are also making significant changes in our approach to political and legislative engagement and advocacy.
Our activity in this space will be much more limited than it has been in the past.
With closer alignment to our strategic goals.
And with additional oversight and significantly more robust disclosure.
With this additional transparency my goal is to make it crystal clear exactly what efforts we support.
These efforts together with enhanced policies and procedures will help to bring additional clarity around appropriate behaviors at firstenergy.
And through enhanced communications training and most importantly, our actions.
We are dedicated to re emphasizing that every employee at every level has the responsibility to consistently act in accordance with our core values and behaviors and to speak up if they see inappropriate behavior anywhere in the organization.
At the same time, we're taking decisive actions to rebuild our reputation and brand and focus on the future.
This includes the decisions recently made with respect to Ohio that I'll talk about shortly.
And while we don't control the timeline related to the Doj and SEC.
We will continue to cooperate fully with these government investigations and remained focused on the matters that we can control.
Chris will address a number of actions the board has underway and a more detailed manner later in this call.
But be assured that both management and the board will be relentless and take the steps needed to position our company for long term success.
Now turning to earnings.
Today, We reported 2020 GAAP earnings of $1 99 per share and operating earnings of $2 39 per share.
On Tuesday, we announced several proactive steps, we're taking to resolve a range of regulatory proceedings affecting our Ohio utilities.
These include our previously announced agreement with the Ohio Attorney General along with the decision not to seek recovery of lost distribution revenues.
This resulted in a charge of <unk> 15 per share in the fourth quarter.
Absent this charge our 2020 operating earnings would have been $2 54 per share well above the midpoint of our most recent guidance range and reflective of our strong performance last year.
While this was a difficult decision we are confident it was the right decision.
We believe resolving these matters.
In a comprehensive manner is a critical step to demonstrate our commitment to transparency and integrity in every aspect of our business.
While taking steps toward removing uncertainty relating to our current Ohio regulatory matters.
And in the interest of providing additional transparency.
Todays investor materials will include more information about regulatory Roe.
In each of the states we serve.
We remain excited about the significant investment opportunities that will continue to drive solid earnings and growth in the years ahead.
When we have further clarity in Ohio, and with the ongoing government investigations, we intend to resume providing a long term growth rate that should be consistent with traditional utility growth rates and similar to what we have provided in the past.
For now we are focusing on this year.
And we have introduced 2021 operating earnings guidance of $2 40 to $2 60 per share.
We have made these disclosures early so you would have time to absorb them before this call.
Because we have a lot of ground to cover today, including.
Our solid operational performance last year, even in the face of the pandemic.
Our strategy for 2021 and beyond including our commitment to building shareholder value.
And the work we're doing to position the company for the future.
Our fundamental performance continues to be excellent.
We continued making demonstrable progress on our strategic goals and we had an exceptional year from a safety perspective.
Even with about half of our employees working from home and the others are adopting new health and safety protocols. The Firstenergy team has remained laser focused on providing safe and reliable service to our 6 million customers.
I'm deeply proud of the team's resilience and commitment, especially in light of the turbulence that marked the year.
Our results in 2020 reflect our commitment to strong operations as well as the stability provided by our diverse footprint and our wires focused platform.
Last year, we also successfully executed our plan to invest $3 billion in our distribution and transmission systems as we continued our reliability and grid Mod program to benefit customers.
We believe our robust long term organic growth opportunities are well aligned with the focus on electrification and the critical role the grid plays in supporting the transition to a carbon neutral economy.
These opportunities and our goals that support them are included in our strategic plan published last month and available on our website.
I hope you have taken some time to review it.
This updated plan addresses our unwavering commitment to transparency and accountability and identifies bold goals for key areas of our business.
These goals are aligned with our core values and behaviors are.
Our regulatory strategy and our commitments to our customers communities and investors as well as environmental stewardship.
Among these objectives outlined in the plan is our pledge to achieve carbon neutrality by 2050. This ambitious goal reflects our transformation to a regulated electric utility and our responsibility to help create a sustainable energy future.
The strategic plan also addresses our continued commitment to build a more diverse and inclusive workplace.
<unk> had a DNI focused kpis for three years now and we are taking even more aggressive steps to make progress in this area.
We're excited to pursue a 30% increase in our number of racially and ethnically underrepresented employees by 2025.
Both overall and at those supervisor and above level.
We believe this will help accelerate our transformation into an innovative diverse and sustainable company and.
And drive an important shift in our corporate culture.
We recently completed our fourth companywide survey of all employees.
Overall I'm proud to say, we scored relatively well on many fronts, but we certainly have more work to do.
One area identified for improvement is listening in valuing the opinions of our employees.
We want employees to feel empowered to voice their opinion on important issues and.
And my team with guidance and support from the board of Directors is addressing this head on.
We view this work is central to strengthening our compliance program and a culture of ethics integrity and accountability.
I would like to explain my approach to driving this change and perhaps we can use the company's safety culture as an analogy.
Several years ago, we had concerns that our safety culture was trending in the wrong direction man.
Management led a significant effort with our employees to put in place new programs and training.
And to consistently demonstrate that safety is and will always be an unwavering core value.
These efforts ultimately instituted a cultural shift and how we all understood the critical importance of safety.
We want that very same cultural shift to occur as it relates to compliance and ethics, and we want our employees to know that we value and welcome their opinions.
As we look ahead I feel confident in our path forward, we have a strong foundation, our fundamentals are solid and our strategies are proven.
And we are building on that with a relentless focus on making Firstenergy a better company as we work to rebuild trust work to achieve financial results and deliver for our customers and investors.
We recognize the changes won't happen overnight.
They happen over time, just like the evolution in our safety culture I spoke about earlier.
I am confident we will emerge a stronger better firstenergy.
Now I'll turn it over to Chris Pappas, who can address the specific and significant actions that the board and management are taking to address the current challenges and set firstenergy on the right path for a successful future.
Thank you Steve.
First I'd like to reiterate the board's strong support of Steve.
And recognize the hard work he and the rest of the team are doing.
We commend their willingness to learn from the past.
And our absolute commitment to take this company forward on a new path.
All while executing the companys strategy and keeping operations and financial results on solid footing.
The board and management team are focused on our critical objective to.
To move forward from the past actions of certain former executives and to take the steps necessary to improve the tone at the top.
Culture of ethics and integrity.
And the way we do business.
Steve talked about a lot of the important work that is being driven by the new management team.
Likewise, the board is committed to strengthening every part of Firstenergy is culture.
And taking the necessary steps to reestablish credibility.
Together, we have made much progress on the issues that confronted the company several months ago.
And at the same time.
We recognize there is more work to do.
I'd like to recap some of the steps that the board has been actively engaged in to drive improvements in our culture of compliance.
First the.
The board promptly put in place an independent committee.
With external counsel to oversee the internal investigation and to monitor the status of the various regulatory and legal matters facing the company.
The Independent Committee, which currently is made up of the entire board meet.
Meets frequently and regularly.
The board at just swiftly and removal of five executives.
Named Steve Streit as acting CEO.
Establishing an executive director role.
And expanded the role of the Board chair.
All to assist management and the board with the dynamics, we faced in the first months of the investigation.
The board unequivocally endorsed the principle of full cooperation with both the Doj and the SEC on the matters related to the investigation.
And through our own internal investigation.
Led by independent counsel.
As supported intensive analysis.
The board established a compliance oversight subcommittee of the audit committee with independent counsel, and leading compliance advisors to analyze and improve.
Appliance policy and culture at Firstenergy.
Steve mentioned some initial output from this work earlier.
In addition.
The board established a number of working groups to oversee and support various work streams, including communications recruiting and financial flexibility.
And to that point management has initiated a project called first energy forward at.
A transformational effort to change the way the company does business.
The objective of this project is to transform the company for the future that it will.
We'll also provide near term financial flexibility.
John will discuss this later on the call.
We know there is particular interest in the status of the internal investigation.
Hopefully my earlier comments give you a sense of the intensity.
And the magnitude of the work that has occurred within the company and with the benefit of extensive external independent support.
Our internal investigation continues to be thorough and robust and.
That includes assistance from external law firms, who are supported by several other consultants.
The ongoing investigation has not resulted in any new material items not previously disclosed.
In the course of the internal investigation, we did identify certain transactions, which in some instances extended back 10 years or more include.
Including vendor services.
Either improperly classified.
This allocated to certain of the utility or transmission companies are lacked proper supporting documentation.
These transactions resulted in amounts collected from customers that were immaterial to firstenergy.
In our utility and transmission companies, who will be working with the appropriate regulatory agencies to address these amounts.
Our internal investigation will also continue to address any developments in connection with the ongoing Doj and FCC investigations.
More importantly.
We are increasing our focus on another critical aspect of our work.
Moving first energy forward.
The fresh perspective of human Park, and a new chief Ethics, and compliance officer will be invaluable to creating an environment, where the entire team is committed to embracing the right behaviors and embedding a strong culture of compliance.
To further that effort.
We also announced this morning that we have hired John Summer Halder, as Vice chairman of the board.
It is my pleasure to welcome John from the board in his new role.
He will also join the executive team on a transitional basis as executive director and.
And act in an advisory capacity to support efforts to achieve the company's priorities restore its reputation and strengthen its overall governance and compliance functions.
John has a 40 year industry executive with extensive energy experience in navigating complex challenges and driving strong corporate governance.
Bringing John into this full time role means that I will step back from the executive director position I've held since October and returned to my regular duties as an independent board member by April one.
And importantly, we will continue to fully support the management team as it transitions firstenergy for the future as a more resilient company.
Despite the challenges the company has faced.
First energy's operating fundamentals are strong and.
And we have a great platform of assets.
Together, we have put in place a robust plan to move forward.
And to position Firstenergy as an industry leader.
One we know it can be and one that will deliver excellent value to its customers and shareholders.
We look forward to working together alongside with management in this effort.
Now I will turn the call over to John Taylor for a financial update.
Thanks, Chris and good morning, everyone today, I'll review, our financial results and expectations and provide an update on several other financial matters.
This morning, we reported fourth quarter GAAP earnings of 45 per share with operating earnings of 32 per share.
Our operating results include the charge at our Ohio utilities that Steve mentioned earlier.
Absent this charge our results reflect continued rate base growth related to our transmission and distribution investment programs, a favorable mix of customer usage, reflecting the impact of our residential customers staying at home and higher expenses, mostly associated with the pandemic.
Additional fourth quarter data is available and the supporting materials on our website. So in light of our lengthy agenda for this call I'm going to focus on our results for the full year of 2020.
As Steve mentioned, we reported 2020 GAAP earnings of $1 99 per share and operating earnings of $2 39 per share, which compared to 2019 GAAP results of $1 70 per share and operating earnings of $2 55 per share.
And our distribution business. In addition to the 15th charge at our Ohio utilities results for 2020 as compared to 2019 reflect the absence of rider DMR in Ohio, which was in place for the first half of 2019.
And higher operating costs.
These were partially offset by higher revenues from increased residential usage as well as earnings from our distribution enhancement programs.
Although total weather adjusted sales decreased 2% in 2020.
Normally usage from our residential customers increased 5% for the year.
Which from an earnings perspective, more than offset the 6% decrease in commercial and industrial loan.
While this shift has moderated as a pandemic wears on we have seen higher weather adjusted residential usage relative to our latest forecast in the 2% to 4% range with flat to slightly higher C&I usage.
In our transmission business, approximately $550 million and rate base growth drove stronger results, which were partially offset by higher financing costs the impact of transmission rate true ups and the absence of tax benefits recognized in 2019.
And finally at our corporate segment full year 2020 results, primarily reflect higher corporate expenses higher interest costs and a lower consolidated tax rate.
Today, we are providing 2021 operating earnings guidance of $2 40.
To $2 60 per share in first quarter operating earnings guidance in the range of <unk> 62.
70 <unk>.
Per share.
Our expectations for the year include capital investments of up to $3 billion with 100% of the $1 $2 billion in transmission investment and approximately 40% of the $1 7 billion in distribution investment being recovered in our formula rate.
Our transmission plan includes continued expansion of our energizing the future program in New Jersey, We filed an uncontested settlement agreement with FERC on February 2nd and our forward looking formula rate case.
In December <unk> accepted our proposed tariff revisions for the transmission assets in West Penn Power, Mon power and Potomac Edison as well as the new Keystone Appalachian transmission company known as Cat co pending the outcome of the settlement and hearing process.
Those entities moved to a forward looking formula rate structure effective January one of this year subject to refund.
Other key drivers for 2021 include the impact from the base distribution case at <unk> continued investment in our distribution enhancement programs and lower operating costs.
We expect these drivers to be partially offset by higher interest expense, which includes close to <unk> <unk> per share associated with the step up on $4 billion of holding company bonds and <unk> per share associated with our revolver borrowings that I'll address in a moment.
Additionally, our load forecast as a more typical usage profile from our residential customers and a slower recovery to pre pandemic levels for our C&I customers.
Equity remains a part of our overall financing plan and we are affirming our plan to issue up to $600 million in equity annually in 'twenty, two and 'twenty three and we will flex these plans as needed.
We remain committed to maintaining adequate liquidity for our distribution and transmission subsidiaries at.
At year end, our liquidity was approximately $3 billion.
With $1 $7 billion of cash on hand, and $1 3 billion of Undrawn capacity under our credit facilities.
We currently have $2 2 billion of short term borrowings of which approximately $2 1 billion was incurred in November as a proactive measure to increase our cash position to preserve financial flexibility.
And we are committed to our bank group that as we work through our financing plan, we expect to reduce short term borrowings with the timing and amount dependent on a number of factors.
Our current maturities of long term debt remained manageable with only $74 million maturing in 2021.
We remain in close contact with the rating agencies, who are intensely focused on governance and the actions were taken to strengthen our compliance environment and controls.
Improving our credit metrics at Firstenergy, while committed committing to return to investment grade as quickly as possible and maintaining a strong credit ratings at our utilities are key priorities.
We are targeting future <unk> to debt metrics and the 12% to 13% range at the consolidated level as we work to address some of the uncertainties that Chris and Steve mentioned.
We know how important the dividend continues to be for our investors in accordance with our target payout ratio of 55% to 65%. The board declared a quarterly dividend of <unk> 39, and December payable March one.
And as we mentioned on our third quarter call. Our intent is to hold the 2021 dividend flat to the 2020 level of $1 56 per share subject to ongoing board review and approval.
The board will obviously need to consider the entire landscape of the investigation process before each quarterly dividend is declared.
Finally, Chris mentioned that we've kicked off a project for an ICU transforming firstenergy into a more efficient and effective industry leader delivering superior customer value and shareholder returns.
In partnership with Mckinsey employees across Firstenergy are challenging organizational traditions conventional wisdom and cultural norms.
At the same time, we are focused on modernizing our management practices processes, and digital and technology platforms to deliver a superior customer experience and a much more nimble organization for the future.
While we view this as a transformational effort, we expect to naturally deliver efficiencies that will help us address whatever comes our way in the future.
Meeting all of our regulatory commitments.
Beyond these benefits we expect that this transformation will provide us the ability to reinvest in our business our customers and our employees to become a better technology enabled leader in the industry committed to innovation investments in emerging technologies and to support a smarter and cleaner electric grid.
While this project is not the only step in our journey, it's a critical one.
The eight week information gathering phase of the project included intense and robust employee engagement to better understand how we work and how we can do it better through the use of more modern technology digital and mobility tools and the use of data and analytics.
As we enter into the next phase of this effort, we will again engage employees throughout the company to review and assess each opportunity and build out the plans to transform firstenergy.
Over the next few months, we will build out specific actions for the future, which we look forward to sharing.
Before we open up the call to Q&A, we wanted to provide a recent update which we disclosed in our 10-K. This morning.
We received a letter dated February 16th 2021 from Icahn capital.
<unk> the company that Carl Icahn is making a filing under the Hart Scott Rodino Act and has an intention to acquire voting securities Firstenergy, an amount exceeding $184 million, but less than $920 million, depending on various factors including market conditions.
We do not know whether Carl Icahn and his affiliates have acquired shares of Firstenergy common stock and our derivatives and we do not know his intentions with respect to our company.
The latter represents our only contact with Icahn capital and we don't have any additional information to share.
With that we can open up for questions.
Thank you we will now be conducting a question and answer session.
If you'd like to ask a question today. Please press star one from your telephone keypad and confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
Competitions that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment please poll for questions.
Thank you and our first question is from the line of Shar <unk> with Guggenheim. Please proceed with your questions.
Hey, guys. Good morning, it's actually James for sure.
Good morning, So just on Etsy for if we could start off on that last point can you give us any color on maybe the size of the scope and some of the potential efficiencies that youre trying to identify especially as we're kind of coming up at the small cell uptake.
Yes, that's correct James.
As I mentioned, we view this as a as a transformational effort and if you think about our company.
We've not had a lot of <unk>.
Investment.
In the technology areas in fact.
I think.
We've kind of star of that area to a certain extent in for instance, mark.
Modern investments around mobility.
Use of data and analytics that we see could drive a lot of value for the company.
In some instance, I would tell you that we're operating on late <unk> and early 2000 vintage platforms and so we see a lot of opportunity.
For efficiency.
Integration of systems digital tools to drive efficiencies use of automation and data analytics around asset health maintenance work, whether it be repair replace decisions.
Vegetation management programs procurement.
And so we're excited about the opportunity.
Just finished phase one of the projects and I think our employees are very excited I think they see this as a real opportunity.
And the amount of opportunity was meaningful enough to go into phase II and so we'll be building out the blueprints.
In phase II and then as we are.
Make progress we will continue to provide updates.
Yes, I would just add John I think that's a great rundown from my perspective this.
This project is not only looking at the ability to promote greater financial flexibility, but I think it's a real prime time opportunity for US now that we're a fully regulated electric utility.
To keep the customer in the middle of our focus also.
I think this project will represent opportunities just as John outlined to to keep the customer in the middle of the mission and improve customer service ultimately.
That's super helpful. And then I guess just.
Turning to the 'twenty one guide.
The flexibility in the Capex program can you just provide a little bit more detail on where that is.
And if you'd wind up flexing it I guess what is the plan to revisit that foregone spend in future years will primarily be in 'twenty. Two is that just a function of financing it.
Any color there.
I think we have flexibility in most all of our programs I mean, you think about a $3 billion across.
13.
Utility and transmission companies, there's obviously opportunities across the spectrum and so I think it's kind of a wait and see mode, but I do think there are some opportunities for us to be more efficient and if we need to scale back we can do that.
But.
That's something that we'll address down the line.
Gotcha, and I guess, what should we expect you to start standing up new projects and catch up.
I think as early as this year.
Spending some money this year in KEPCO or excuse me not cat co, but the territory West Penn Mon power.
And Potomac Edison, that's where we're spending the money, but I think cat COVID-19, probably a little bit further down the line.
Got it.
Great. Thanks, guys Congrats again.
Our next question is from the line of Steve Fleishman with Wolfe Research. Please proceed with your questions.
Okay.
Yes, hi, good morning.
So first of all could you just repeat.
The comments that you just made regarding this.
Icon letter that you received.
So yes, we received.
The letter from icon It was dated February 16th.
I had.
Expressed his intentions to buy securities of Firstenergy.
And that's pretty much all we all we know at this point in time, yes.
We thought it was noteworthy and Thats why were just being open and transparent about it cant really comment as John said, we just don't know enough at this point, but.
Look we just reviewed many very good actions that the board and management have taken together.
As we work as a team completely through.
Our current challenges and we're just going to continue to do the right thing and open and transparent way and that's going to be to the benefit of all shareholders.
Okay.
Second question is the <unk>.
The things that you've found about these transactions that were improperly classified.
But were immaterial.
Was there certain.
Kurt.
Types of.
Transactions here that were that were improperly classified so are these like a lot related to let's say like lobbying our government affairs or is it a whole bunch of different things.
Hey, Steve Hi, its Chris Pappas.
So we found as noted in the comments.
Relatively small amount of <unk>.
A variety of transactions.
Over a long period of time, we mentioned up to 10 years and in some cases beyond so the context for this that I think is important is.
We have taken a extensive deep analysis of all kinds of transactions in the company.
That includes the zones you are describing it could be.
Lobbying political it could be contracts and there's a whole variety of things.
And in that process, we identified.
Some transactions that were improperly.
Characterized allocated.
Not supported small amounts not material.
And those amounts will now be in discussion with the jurisdictions.
Were they occurred.
From a regulatory group.
And they will be managed going forward through that process. So I want to leave you with one impression.
A lot of work and extensive amount of deep analysis.
And a limited amount of findings as a result of that essentially in the arenas that I described.
Okay, but you can't characterize kind of the type of.
Whether these were all kind of similar type.
<unk>.
No well they range from what I described they could be a vendor payment that was an appropriately allocated they could be.
Lobbying effort there was an appropriately allocated there are a whole variety of small items like that.
Tom.
Focused in one area or otherwise.
And these are small items over a long period of time that we will need to be corrected.
Okay.
And then lastly, just.
The.
The release, you put out two days ago there was.
Besides offering to not charge for the.
Energy efficiency recovery.
You also.
Basically kind of gave a olive branch so to speak to all parties to try to.
Have discussions on all the various regulatory issues in Ohio that are pending do.
Do you have any sense of.
Our reaction to that and or any sense that other parties.
Are interested in negotiating with you right now.
Yes.
Steve I would I would just say in general we're.
Taking a new and fresh approach to Ohio.
It's one of collaboration and creating a more constructive environment.
And it's really around listening and learning in terms of not only the regulator's views, but all of our stakeholders.
And the first step was to forego the loss distribution revenue.
Issue.
It was consistent with the partial settlement that we arrived at with the Ohio.
The attorney General and we felt as though it was the right thing to do.
And this idea of taking the known items that are on our collective agenda in Ohio.
Yes.
Bundling them together in a collaborative process is really what we're aiming at here.
I'm going to turn it over to Eileen Mikkelsen to give us a sense of.
Dialog that we have had at a very high level and then any other color commentary. If you will you would like to lend if good morning, everyone as highlighted Michael <unk>, Vice President of rates and regulatory affairs as Steve mentioned, we have begun the process of outreach to various regulatory stakeholders in the <unk>.
Date of Ohio.
Lying to express to them our interest in moving forward.
Clear transparent cohesive fashion, but also taking time to listen listen to what.
To the various regulatory stakeholders and using that listening exercise to collectively craft a solution that will move.
<unk> move us forward for our customers and for the state of Ohio as well as the company in terms of early returns I think folks are very interested in moving forward with this process as you might expect.
Our enthusiasm is tempered a bit by let's wait and see we have to put our money where our mouth is in terms of our ability to listen and work collectively with these people and we're willing to run the gates to do that in order to gain the trust and support other stakeholders in order to move us forward in the regulatory process here in Ohio.
Thank you very much.
Our next question comes from the line of Julien Dumoulin Smith with Bank of America. Please proceed with your questions.
Excellent guys. Good morning. Thank you so perhaps let me try to clarify a couple of points from the last couple questions. Here. So first can you try to summarize what's reflected in your 'twenty one guidance.
With with respect to the cost cutting efforts that you just alluded to and I know that the transitory, but I just want to understand in 'twenty, one and what that means for 'twenty two.
Obviously, there is cost cutting theres potentially paying down the revolver here and then also more holistically. How do you think about balance sheet improvement here when you talk about flexibility et cetera.
Mark.
Overall latitude to firm up the balance sheet for whatever may come.
So Julian this is Jon So I would tell you that we don't have anything in the current plan related to Etsy forward.
We view this more as a transformational effort thats going to take some time it could take two to three years, there could be some opportunities for some quick wins.
But we don't have anything currently baked into our 'twenty one plan.
There could be a little bit of upside I'm not going to commit to that right now.
It is working through the.
The next phase of this project.
We will we will see if there is opportunity to accelerate some of the opportunities.
Or are we just let it flow naturally through the course of the program, but again.
I don't view this as a cost cutting exercise I view this more of a transformational effort, that's really focused on creating efficiencies for the long term.
Right.
The balance sheet, how would you describe the knee creating.
Having if you will through this and other efforts.
Well I mean, I think as if.
If we are able to create.
Create efficiencies through.
Through the P&L, obviously, that's credit positive.
So we can look for those types of opportunities.
It might scale back some of the Capex in terms of being more efficient in the work we do.
But at the end of the day the plan is going to be.
To reinvest some of those dollars into our customers our employees.
And for emerging technology type of investments.
And to support kind of a renewable type of grid.
So it's.
It's not going to be dollar for dollar efficiencies.
B efficiencies used to reinvest in our business whether that be employees or customers.
Okay.
Excellent.
If I can just jump in and clarify the last response, a little bit too with respect to stakeholders in Ohio.
Approach.
Mark.
Dockets out there right now how do you think about bringing stakeholders together to get some resolution.
Obviously, you've got to deal with each one of these but could there be something more comprehensive and if so what would that look like again I don't im.
Im not presuming that there is.
It's tightening and thanks for the question I think what we intend to do as you are right. There are a number of open proceedings in Ohio, but as I mentioned earlier.
We intend to do as the first step in this process is really listened listened to the various stakeholders to understand what their interest is what their concerns if any are with respect to the regulatory construct and I would say that includes open proceedings, but it includes whatever's of interest.
The regulatory stakeholders, who want to sweep all of that into to one big process I will say it is not our intention to.
Step step away from or interrupt any of the work. That's currently going on from the commission proceedings, whether it's the show cause proceeding or the corporate separation preceding or they got out of TMR. We expect that work to continue we will fully participate and cooperate in that work, but on a parallel path we want to be.
Working with all of these parties to understand what's important to them and what we can do collectively can move this issue forward given the state of Ohio.
Okay.
Okay excellent I'll leave it there. Thank you all best of luck.
Thanks Julien.
Thank you. Our next question comes from the line of Turkish Chopra with Evercore ISI. Please proceed with your questions.
Hey, good morning team. Thanks for the time, John first one for you just going back to the balance sheet just can you.
Quantify your <unk> to debt.
As of 2020.
Last year in and what does it look like in 2021 under your current plan.
So I think we were around 10%.
At the end of 2020, if I got credit for the cash that we had on the balance sheet.
We're going to be a little bit north of that this year, but that's going to improve over time as we issue the equity as.
As we look to implement Anthony forward.
And so we're targeting.
Some time once we get through some of these uncertainties in the 12% to 13% range that is our target for our go forward plan.
Got it okay. So 2020 plus is when you expect to be net 12 13 rich understood.
Okay, and maybe just.
Anything you may not be able to comment on this but just can you give us any more color on the under a federal investigation process.
Where does that stand or you exchanging information or answering their questions just any other color would be appreciated. Thank you.
Well the side even.
Oh I'm sorry go ahead, Chris.
Okay, and then you can follow up but sure.
So the short answer is.
We're still cooperating look we have taken the approach from the beginning.
Cooperating with both the Doj and the FCC and full cooperation is the right approach.
We have done a number of things to support that and we will continue to do that otherwise, we really can't comment any further I would however, say that the cooperation.
It's just one of the cornerstones.
The shift and change in this company that Steve and others are driving.
I hope youre getting that impression more broadly.
Not just around the cooperation but more broadly around.
The dynamics of compliance improvement the activities of the board the bringing on.
New executive director and Vice chair with extensive experience in the.
Energy and utility space John.
Halder, who will be a great add.
The bringing on of human Park.
The eventual onboarding of the new <unk>.
Compliance and ethics officer.
Changes that the company is making in its compliance and ethics program as part of the work of the subcommittee of the audit Committee.
All of these things in concert are moving the company forward.
In a way that Firstenergy is going to emerge from this and say, we think stronger and different and better company.
So I'd like you to keep all that in mind as you guys think about that.
The dynamics going on here Steve go ahead.
Chris I think I think really summarized it very well there so.
I can speak in particular for the management team, we're very excited to bring John on with he has deep and long experience.
We're just really very excited to get started.
Understood and certainly we do appreciate it and.
Thanks for the added disclosure in the appendix. Thank you.
Thank you.
Our next question is from the line of Jeremy Tonet with Jpmorgan. Please proceed with your question.
Hi, good morning.
Just one.
Thanks, I just wanted to pick up with the discover deficiencies.
Could you provide which day these.
Materialized in or outside of Ohio, as well when do you expect these findings represent the full extent of recording deficiencies here or could there still be more.
Oh, Hi, Jeremy Chris So.
Look.
As we said.
Extensive deep long work.
Long time framework small amounts.
The majority of it is in Ohio, but there are small amounts in other states.
All of those will be addressed by Irene and her team we believe in a constructive.
Manner with those jurisdictions.
They're very small amounts we don't expect them to have an impact on the company.
Got it.
Helpful.
I was just wondering if you might be able to provide any more kind of early feedback you've gotten on some of the recent steps you've taken here. It seems like quite comprehensive overall do you think people are enough to mitigate concerns over internal practices.
Wait for the resolution of the investigations here and have the agencies, giving you any feedback from these recent measures.
Well all I can say is we're in touch with the agencies regularly.
And.
And we are continuing our work we have done a lot of work and we'll continue our work I'm not going to predict.
Timing or outcome.
These are our internal continued work or the of course the federal work.
But yes to your question are we.
Working with them closely on these activities of course.
So Jeremy this is John I'll add a little bit of color. There. So we've been meeting with the agencies every month for the past and I am talking about the rating agencies for the past several months I think the meetings have been very productive we've had Chris on the call a couple of different times there.
Their focus is on governance compliance and we've been providing them updates.
As we make progress I think the meetings have been very constructive and I feel as though they are they are positive meetings, but I think they are still in kind of a wait and see mode.
And I think they want to see the changes in action before they consider any type of.
Things change our outlook change.
And I think they also want to see how this investigation plays out so.
We're going to continue to meet with them on a regular basis and update them on our on our progress, but I think so far the meetings have been very constructive.
Open and very transparent.
Got it and any other early feedback from other stakeholders.
In response to actions you've taken here.
I think I think in general if you would look at the regulators that we have approached.
There is a thankfulness by them.
Relative to us reaching out in a very transparent manner on issues of interest.
So once again, we as a company are going to continue to take what I would call a no surprises approach.
I think thats being received very very well.
As Chris had talked through in his prepared remarks.
The board has taken comprehensive and decisive action in a number of different ways and I think from the various stakeholders that we've been in touch with them.
The feedback certainly has been very good there is a difference however between Tom.
Talking about creating change and then being that change and that's exactly what we're in the process of converting words into action.
And there will be more.
Got it that makes sense I'll stop there. Thank you.
Thank you.
Yes.
Our next question is from the line of Paul Fremont.
Mizuno. Please proceed with your questions.
Great. Thank you very much.
I wanted to focus on a change in language.
Between the current 10-K in the last 10-Q on the $4 million termination payment.
You basically say you believe that the payments under the consulting agreement.
Now they have been for the purposes other than those represented within the consulting agreement.
Can you.
Maybe elaborate a little bit on that and is this $4 million payment included in the <unk>.
Accounting.
Classifications that you mentioned earlier.
So Paul this is Sean Park.
Denise New CLO.
What I would say is that.
These.
Investigations proceed.
We learn more and we understand more.
And as we do so we update our disclosure and the language. That's in the 10-K as it reflects our current understanding of that.
Tuition, so I'll just refer you to the <unk>.
10-K, and the rest of that disclosure in there.
And does this fall within sort of the.
Accounting payments that are under review or that are being reclassified.
Yes, Paul this is John with the $4 million was part of.
The analysis that Chris spoke about earlier.
But I would just day answers taker clarity that if we talk about a nominal payment amount that doesn't necessarily equate to the amounts that would have been included in customer rates theres, a whole ratemaking process and timing around that that really translates.
Nominal dollar amount that we're talking about relative to the payment into what would actually landed in customer rate.
Great. Thank you very much.
Thank you Paul.
Our next question is from the line of Steven Byrd with Morgan Stanley. Please proceed with your questions.
Hi, good morning.
Good morning, I wanted to start just as you think about your equity needs over time.
In terms of just your overall approach.
I guess, if you were to <unk>.
<unk> common stock at the current level, it's obviously very dilutive given the very low multiple we've seen other utilities approach raising capital and pretty interesting ways much more accretive ways for example, selling a minority stake in.
Some divisions it looks like there is a tremendous amount of appetite among sort of infrastructure investors to.
To own pieces of utilities as you think about I know you don't sort of that imminent needs, but as you think conceptually about your approach to raising equity are you sort of open to different approaches with what are your thoughts in terms of what might be the <unk>.
Range of options and what what might look more or less attractive to you.
Yeah. Steven This is John I think we're open to different approaches and in fact, we look at that quite regularly I would tell you and I think you're referring to the Duke asset sale right.
I would say that first of all we like our our platform of companies.
We believe each each of our companies is uniquely situated to provide investment opportunities to better serve customers.
And provide growth in earnings and operating cash flow.
I think theres going to be significant investment opportunities at each of these companies that are going to be important to our success, but yes. We've looked at that transaction. It appears to be successful transaction for Duke and it's a very interesting transaction.
So we've looked at those types of things in the past and for US. It just it just hasn't worked primarily due.
Due to tax leakage, but I understand the minority interest piece.
But you know I mean, our normal assessment of.
Of our strategy, we look at those types of we look at those types of things.
Understood and tax leakage might not be as much of an issue in a minority stake situations Jonathan right that's right yes.
Okay, Great. One last one just from me just on the lobbying side I appreciate the.
The approach that you all are taking my understanding is more limited activity more disclosure, it's been a challenge for us to follow <unk>.
Activity not just for Firstenergy, but for others.
The 500 ones. He force structure, there's virtually no visibility could you just talk to sort of what you said more disclosure what could we expect in terms of money given the 501 C. For is how do we sort of get confidence as to what money is going where.
Well.
Good question.
Just so we're clear on our current approach undermined leadership, we've made some significant changes immediately.
So we've ceased all political contributions and we're evaluating what our path forward will be when playing in that space I would say.
And that also includes 501 C Force you can count on us not contributing any 501 C. Four that is politically focused.
And that's going to form the basis of our activity going forward. So what we're doing is we're working internally and we're working with our board of directors to get clarity around what our internal expectations are what our philosophy and pathway will be moving ahead.
And the way I look at it we're going to get involved in items of this kind.
In which we could look at every employee directly in the eye and explain the why behind the what of what we're doing in this arena.
So what we're working on at least from our standpoint.
Is that great reduction in 501 C for giving any way so it's going to be a non factor for us.
And then secondly, we're going to be working with the subcommittee of our audit Committee from.
From a compliance standpoint to make sure that we have the reporting that we need internally that will satisfy us and then we will work to form something that that we will publish in our fact book and in other areas.
That's that's our current thinking.
That's really thoughtful and helpful. Thank you very much that's all in.
Our next question comes from the line of Angie <unk> with Seaport Global. Please proceed with your questions.
Thank you. So I have two questions one about the <unk> to debt expectations your equity needs on <unk>.
<unk>.
Our earnings in Ohio are down.
So how can you maintain this.
This day muscle Shoals adapt.
Well I think as we invest in our transmission business in these distribution enhancement programs it naturally generates SFO.
And so even in our plant.
Board.
Our current equity plan.
We continue to trend upwards from the 10% we're at now so.
As we continue to invest in these programs, we manage our costs internally that should naturally provide for higher <unk> to debt.
Okay, and then separately on electric transmission it seems like.
Mark will be making some changes to competitive transmission you guys have.
Gary sizable electric transmission networks do you think that.
Any changes to order 1000 will actually.
Basically accelerate gross prospects for this business and also.
With regards to potential asset sales I understand that the tax leakage, but with the.
The sale of the transmission business or parts of it also have this issue with the tax basis given that.
This business.
James newer and so I would assume that the tax basis is much higher.
Angie.
From from our viewpoint.
Any work that FERC is doing on FERC 1000.
We're staying plugged into and collaborating where we need to but right now.
Our operating posture going forward will be to continue to maximize investments improve reliability in our transmission system on our own native footprint and as we've explained in prior calls.
We literally have multiple decades of investment opportunities there for us.
We will have our complete transmission system over time on formulaic rates.
And we view it as an excellent growth platform for our company, but I would also.
Emphasized that we have clearly improved reliability for those areas. Our energizing the future transmission program is focused on and in particular in terms of reducing customer outages in some cases by 50%. So we'll let FERC continue.
Their work, but currently our current business plan is solid once again, we have a great and diverse footprint to move investments around.
And that's that's what you can count on us for moving ahead.
And Andrew to your to your second second question.
You look at the tax basis is probably lower than you think because of bonus depreciation and dividends and that type of thing so.
The transaction that Steven was mentioning wouldn't even trigger a tax consequence, just because you are selling a minority share, but if you were to sell a bigger share it would have some tax consequences.
Okay. Thank you.
Thank you.
Final question, just wondering is from the line of Michael <unk> with Goldman Sachs. Please proceed with your questions Hi, Guy. Thank you for taking my questions and it sounds like Youre, making a lot of progress on a lot of change over a short period of time.
I have a few first of all in your 2021 guidance.
Are you incorporating a step up in kind of G&A costs I mean, obviously, the various law firms external advisers like Mckinsey I would assume they are free.
So I assume that's a little bit of a headwind if it's possible to quantify it. That's the first question. The second question is a little bit on pension funding requirements.
As detailed in the back of the slide deck I just wanted to sanity check are you commenting.
And my reading this right that the cash pension funding requirement as of now is actually a little bit less than some of your maybe your disclosure at this time last year.
Michael This is John So you are correct, it's about $100 million lower in 'twenty. Two 'twenty three I think it went from $500 million to $400 million and Thats, primarily attributable to the asset performance this year.
We had tremendous asset performance in our pension portfolio close to 15% and so that reduced the funding obligation for those years.
With respect to your question around costs I actually think we're going to see cost decline operating cost declined year over year, because we're not anticipating.
As much but I'll call pandemic costs.
That we incurred in 2020.
Think about all the personal protective equipment.
All of the contractors in and bad debt expense for our receivables that we incurred.
In 2020, although we expect that to continue at summary, but not to the rate that we saw in 2020, So I actually think youll see a stop step down in our G&A costs.
Got it so G&A and O&M down year over year, when I think about the 2020 to 2021 break.
Correct.
Got it.
And then one last thing it hasn't really come up on this call can you talk about the process.
Steve for the seat dockets.
And what you are hearing if anything as you kind of prep up for that process to ramp again, starting this spring.
Yes, so Michael I would just say that that is an open docket item and just as we had mentioned earlier, we're going to take a very open and collaborative approach on that.
And for a further view I'd like to just turn it to Aileen.
Steve.
I would say that currently we are scheduled to file testimony in that preceding March 1st part I would add that the consumer advocate in Ohio has asked for.
Procedure I'll stay on that process pending legislative outcome. So we're waiting to see how the commission acts on that but as Steve said. This is one of the many proceedings that we want to address in a collaborative transparent fashion with our stakeholders and intend to do so.
Got it and as their history and prior seat dockets of coming to a settlement agreement with the various parties, including PCL staff.
Yes, we have reached settlement in prior seat cases got.
Got it. Thank you guys much appreciate it.
Thank you Michael.
Thank you.
At this time I would like to turn the floor back over to Mr. Shah for closing comments. Thank.
Thank you very much I wanted to thank everybody for joining today and your continued support thanks for your questions and your insights our performance in 2020 was solid this.
This year, we're committed to continuing that very strong focus and performance and operations. While we are hard at work transforming firstenergy for the future and continuing to deliver value for our customers and shareholders. So thank you very much for joining us today I wish all of you to be healthy and safe during.
During this pandemic period.
And all the best to you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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