Q1 2021 FirstEnergy Corp Earnings Call
The first energy Corp, first quarter 2021 earnings conference call. At this time all participants are in a 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.
Under this conference is being recorded.
It's now my pleasure to introduce your host Irene, Brazil, Vice President Investor Relations for Firstenergy Corp. Thank you Ms. Brazil, you may begin.
Thank you good morning, everyone and welcome to our first quarter 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 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.
Conciliations between GAAP and non-GAAP financial measures. The presentation that supports today's discussion and other detailed information about the quarter can be found in the strategic and financial highlights document on the Investor section of our website.
Participants on today's call include our President and Chief Executive Officer, Steve Straw senior.
Senior Vice President and Chief Financial Officer, John Taylor, and our Vice Chairperson and executive Director John Summer holder.
We'll 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.
Yesterday, we reported first quarter 2021, GAAP earnings of 62 per share and operating earnings of 69 per share.
Which is in the upper end of our guidance range.
As John will discuss our results reflect the continued successful implementation of our investment strategies.
Higher weather adjusted load.
In our residential class and strong financial discipline in managing our operating expenses.
Last month I was honored to be named Firstenergy, CEO and appointed to the board of directors I greatly appreciate the trust and confidence. The board has placed in me since I was named President last May and <unk>.
Acting CEO in October.
I have great pride in Firstenergy and the work our employees do to serve our customers and communities.
It's my privilege to continue leading the company as we navigate our current challenges and position our business for long term stability and success.
As we work to move Firstenergy forward my priorities are.
The continued safety of our employees and customers.
Ensuring that ethics accountability and integrity are deeply ingrained in our culture and supported by a strong corporate compliance program.
Executing effie forward, our transformational effort to capitalize on our potential deliver long term results and maximize near term financial flexibility.
And continuing our investments in infrastructure growth opportunities from electrification grid modernization and renewable integration to benefit our customers.
During today's call I'll provide an update on the department of Justice investigation regulatory matters.
Our <unk> forward initiative and other business developments.
John Summer holder will join us for an update on the board and management's work towards instilling a culture of compliance built upon the highest standards of ethics and integrity.
Then John Taylor will review, our results and other financial topics.
Before we open it up for your questions.
As we discussed on our fourth quarter call. We are committed to taking decisive actions to rebuild our reputation and focus on the future.
Continuing to cooperate with the ongoing government investigations.
We have begun discussions with the Doj regarding the resolution of this matter, including the possibility firstenergy entering into a deferred prosecution agreement.
We can't currently predict the timing outcome or the impact of the possible resolution with the Doj.
Our goal is to take a holistic and transparent approach with a range of stakeholders across the spectrum of matters under review.
This approach is consistent with the changes, we're making in our political and legislative engagement and advocacy.
For example, we.
We are stopping all contributions to 501 C fours.
We've paused all other political disbursements, including from our political action Committee.
And we've limited our participation in the political process.
We have also suspended <unk> terminated various political consulting relationships.
In addition, we will be expanding our disclosures around political spending in order to provide increased transparency.
For example, we have committed to post updates on our website on our corporate political activity relationship with trade associations and our corporate political activity policy, which is under revision.
A comprehensive and open approach is also the cornerstone in our regulatory activity.
In Ohio, we continue taking proactive steps to reduce the regulatory uncertainty affecting our utilities in the state.
This includes our decision in late March to credit, our Ohio utility customers approximately $27 million.
Sure.
This comprises the revenues that were collected through the decoupling mechanism authorized under Ohio law plus interest.
The partial settlement with the Ohio Attorney General to stop collections of decoupling revenues.
And our decision not to seek recovery of loss distribution revenues from our Ohio customers.
Together these actions fully addressed the requirements approved.
In Ohio House Bill 128.
As well as the related rate impact of house Bill six on our customers.
These are important steps to put this matter behind us.
And the other Ohio regulatory matters, we proactively updated our testimony in the ESP Quadrennial review case to provide perspective seat values on an individual company basis.
We are engaged in settlement discussions with interested parties on this matter as well as the 2017 2018 and 2019 seed cases that were consolidated into this proceeding.
During our last call. We mentioned that we were proactively engaging with our regulators to refund customers for certain vendor payments.
Those conversations are underway in each affected jurisdiction.
Ohio at the PUC request the scope of our annual audit of Ryder D. C. R has been expanded to include a review of these payments.
Outside of Ohio, Our state regulatory activity is concentrated on customer focused initiatives that will support the transition to a cleaner climate.
For example on March 1st JC, P&L filed a petition with the New Jersey Board of public utilities seeking approval for its proposed EV driven program.
If approved the four year $50 million program would offer incentives and rate structures to support the development of EV charging infrastructure throughout our New Jersey service territory in an effort to accelerate the adoption of electric vehicles and <unk>.
<unk> benefits to our residential commercial and industrial customers.
And in late March the Pennsylvania, PUC approved our five year $390 million energy efficiency and conservation plan, which supports the puc's consumption reduction targets.
And the other recent developments last week Farsi approved are uncontested JC P&L forward looking formula rate settlement without any modifications.
In March we closed the transaction to sell <unk>, 50% interest in the yards Creek pump storage hydro plant.
And received proceeds of $155 million.
And we also announced plans to sell <unk> Waverley, New York distribution assets, which serves about 3800 customers to our local co op.
The deal, which is subject to regulatory approval, we will simplify <unk> business by solely focusing on Pennsylvania customers.
During our fourth quarter call. We introduced you to forward our company wide effort to transform firstenergy into a more resilient effective industry leader deliver.
Delivering superior customer value and shareholder returns.
We expect the <unk> forward initiatives to provide a more modern experience for our customers with efficiencies in the operating and capital expenditures that can be strategically reinvested into our business.
Supporting our growth and investments in a smarter and cleaner electric grid, while also maintaining affordable electric bills.
During the first phase of the project, we evaluated our processes business practices and cultural norms to understand where we can improve.
While our safety and reliability performance is strong we found opportunities in many areas to enhance and automate processes take a more strategic focus on operating expenditures and modernize experiences for our customers and employees.
We've identified more than 300 opportunities and now we are diving deeper into these ideas.
Eloping detailed executed plans as we prepare for implementation beginning later this quarter.
Examples of this work include improving the planning and scheduling through integration of systems to allow our employees to deliver their best to our customers.
Leveraging advanced technologies, such as drones and satellite imagery to improve our vegetation management programs.
Using predictive analytics and web based tools to provide our customers with more self service options and improve their experience.
And.
Leverage purchasing power to optimize payment terms.
As part of these efforts, we intend to evaluate the appropriate cadence to initiate rate cases on a state by state basis to best support our customer focus strategic priorities.
We will also remain focused on emerging technologies smart grid electric vehicle infrastructure.
And our customers evolving energy needs as we think through how to reduce our carbon footprint.
We're off to a great start this year and yesterday, we reaffirmed our 2021.
Operating earnings guidance of $2 40 to $2 60 per share.
Our leadership team is committed to upholding our core values and behaviors and executing on our proven strategies as we put our customers at the center of everything we do.
We will take the appropriate steps to deliver on our promise to make firstenergy a better company.
One that is respected by our customers.
The investment community regulators and our employees. Thank.
Thank you for your time and confidence now I'll turn the call over to John Summer Halder.
Thanks, Steve and Hello, everyone, it's a privilege and a pleasure to join you today I'd like to start by sharing my impressions of Firstenergy. After almost two months in this role. This is a company with a firm foundation, including our commitment to improve in the area of governance and compliance.
Our commitment to customers by embracing innovation and technology to help ensure the strength resilience and reliability of its transmission and distribution businesses.
Deep seeded and strong safety culture, and a strong potential to deliver significant value to investors through customer focused growth.
Since joining the team I have been supporting senior leadership in advancing the company's priorities strengthening our governance and compliance functions and enhancing our relationships with external stakeholders, including regulators and the financial community.
Steve spoke about our business priorities. So I will focus my remarks today on our compliance work, including remedial actions.
First I'd like to update you on our internal investigation, which has rebuilt no new material issues since our last earnings call to.
The focus of the internal investigation has transitioned from a proactive investigation to continued cooperation with the ongoing government investigations.
Management and the board with the assistance of the compliant subcommittee of the audit Committee have been working together to build a best in class compliance program.
Through these efforts, we have identified improvement opportunities and five broad categories, including governance risk management training and communications concerns management and third party management.
As part of these efforts Firstenergy is embracing our commitment to enhancing its compliance culture to be best in class.
Some of the actions completed to date include hiring our senior Vice President and Chief Legal Officer, John Park in January.
Antonio Fernandez, who joined as Vice President and Chief Ethics, and compliance officer last week and myself.
Yeah.
On the board side, Jesse land and Andrew Tino joined US from Icahn capital in March and the Board has nominated a new independent member Melvin Williams for election at the annual shareholders meeting when Sandy PM Altos term ends next month I believe the insights and experience.
Of these new leaders are helping to round out a very committed and confident board and management team and.
In March the board affirmed our confidence as Steve by naming him to CEO.
Steve has consistently demonstrated the integrity leadership skills strategic acumen, and deep knowledge of our businesses needed to position Firstenergy for long term success and stability.
These changes along with the board's reinforcement of the executive team's commitment to setting the appropriate tone at the top or support a culture of compliance going forward.
For instance, we recently held in of that where the chairman and the chair of the compliant Subcommittee address the company's top 140 leaders regarding the expectations to act with integrity in everything we do.
Our legal Department recently completed training up the ladder reporting and we have enhanced our onboarding process for new employees and for third parties on expectations around our code of business conduct.
Over the course of the next few months there will be many more steps the company will take to enhance our compliance program such as continuing to build the new more centralized compliance organization under Antonio's leadership.
Addressing our processes policies and controls which include additional oversight for political contributions.
Continuing to emphasize our values and expectations and ongoing communications with our employees incorporating compliance into our goals and performance metrics and holding all employees regardless of title to the same standards and.
Enhancing the channels for incident reporting and developing thorough and objective processes to investigate and address allegations of misconduct and ensuring increased communications with and training of employees with respect to our commitment to ethical standards and integrity of our business procedures.
Compliance requirements, our code of business conduct and other company policies and understanding and utilizing the process for reporting suspected violations of law or code of business conduct.
We have also enhanced our internal controls around disbursements to require additional protocols targeted reviews of any suspicious payments and a reassessment of approval levels across the entire company. Additionally in the area of disbursements, we will update and clarify policies and procedures.
<unk> conduct training and Institute a regular audit program that reviews payments and services performed.
A detailed list of the corrective actions, we are taking can be found on pages eight and nine of our first quarter fact book over.
Over the next several months, we expect to make significant progress in the areas of compliance led by Antonio's organization, where it will continue to be overseen by the board and the newly established management steering committee for ethics and compliance.
Through these efforts, we expect the material weakness associated with the tone at the top to be Remediated by the time, we file our fourth quarter earnings.
Our leaders are continuing to elevate the importance of compliance and working to regain the trust of employees and our stakeholders by modeling appropriate behavior and consistently communicating that compliance and ethics are core values just like safety.
We are committed to ensuring that employees understand what is expected of them and are comfortable reporting ethical violations without fear of repercussions.
By continually emphasizing the importance on compliance to our strategies in future as well as demonstrating that we are setting the right tone at the top we strive to bolster confidence among our employees that the management team and the board are taking the proper decisive actions to move the company forward.
I believe we have learned a lot from recent challenges and are taking the right actions to emerge as a better stronger company with a bright future.
Now I'll turn the floor over to John Taylor for a review of first quarter results and a financial update.
Thanks, John before I review the quarter, you have probably noticed a new look to the materials posted to our website.
We have provided new disclosures on three main areas within our Investor Factbook.
Our steps to support a cleaner smarter grid and the movement to more green and renewable resources.
Additional disclosures on our balance sheet.
<unk> or funds from operations target and the steps, we're taking to achieve our goals in.
Third enhanced ESG disclosures.
Also note that we continue to provide more robust disclosures on Roe.
Including more granular sensitivities.
Yesterday, we announced GAAP earnings of <unk> 62 per share for the first quarter of 2021 and operating earnings of <unk> 69 per share, which was at the upper end of our guidance range.
GAAP results for 2021 include two special items regulatory.
Regulatory charges related to customer refunds associated with previously collected Ohio decoupling revenues and.
And expenses associated with the investigation.
And our distribution business our results for the first quarter of this year as compared to 2020 reflect higher residential usage on both an actual and weather adjusted basis.
As well as growth from incremental riders and rate increases.
Including <unk> and grid modernization in Ohio, the distribution system improvement charge in Pennsylvania.
And the implementation of our base rate case settlement and New Jersey.
These drivers were partially offset by <unk> 10 per share related to the absence of Ohio decoupling revenues.
And our decision to forgo the collection of loss distribution revenues from our residential and commercial customers.
Our total distribution deliveries for the first quarter of 2021 decreased 2% on a weather adjusted basis as compared to last year, reflecting.
An increase in residential sales of 2% as customers continue to spend more time at home in the first quarter of 2021 a.
A decline of 7% and commercial sales.
And in our industrial class first quarter low decreased 3%.
It's worth noting that total distribution deliveries through the first quarter are consistent with our internal load forecast with residential demand, 2% higher versus our forecast.
While industrial load is down 2%.
And our regulated transmission business earnings decreased as a result of higher net financing costs, which included an adjustment to previously capitalized interest.
Partially offset by the impact of rate base growth at our Etsy and main subsidiaries.
Finally in our corporate segment results reflect lower operating expenses offset by the absence of a first quarter 2020 pension and <unk> credit.
Related to energy harbors emergence from bankruptcy.
As well as higher interest expense.
We are off to a solid start for the year and are reaffirming our operating earnings guidance of $2 40 to $2 60 per share for 2021.
We've also introduced second quarter guidance of 48 to 58.
Per share.
In addition, our strong focus on cash helped drive a $125 million increase.
And adjusted cash from operations.
On a $185 million increase in free cash flow versus our internal plan for.
For the first quarter.
As to a couple of other financial updates our 2021 debt financing plan remains on track.
In March Firstenergy transmission issued $500 million in senior notes and a strong well supported bond offering that showcase the strength of our transmission business.
The deal was oversubscribed and on par with an investment grade offering.
We used the proceeds to repay $500 million in short term borrowings under the revolving credit facility.
In addition, we repaid $250 million.
At the Firstenergy holding company.
We also successfully issued $200 million in first mortgage bonds at Mon power in April.
That was also very well supported.
This supports our earlier commitment to reduce short term borrowings.
As well as our goal to improve our credit metrics at Firstenergy.
Returned to investment grade as quickly as possible and maintained our strong credit ratings at our utilities.
We continue to provide the rating agencies with regular updates on our business.
And we are working with them to develop a clear outline of what is needed to return firstenergy to investment grade credit ratings.
Key milestones include governance and compliant compliance changes at our company.
Resolution of the Doj investigation.
And solid credit metrics.
As to more longer term financing needs through the execution of <unk> forward, we have reduced our debt financing plan by approximately $1 billion through 2023 may.
Mainly at the Firstenergy and Firstenergy transmission holding companies.
Additionally, as.
As we have previously mentioned equity as an important part of our overall financing plan with.
With plans to raise up to $1 2 billion of equity over 2022 and 2023.
As we said previously we will flex these plans as needed.
And we are also exploring various alternatives to raise equity capital in a manner that could be more value enhancing to all stakeholders.
These actions combined with new rates at <unk>.
And our 60% plus formula rate capital investment program.
We'll generate $150 million to $200 million.
Of incremental cash flow each year.
While maintaining relatively flat adjusted debt levels through 2023.
All of which will support our targeted 12% to 13% <unk> to debt range.
Turning to our pension our funding status was 81% at March 31.
From 78% at the end of last year.
Resulting in a $500 million reduction.
And our unfunded pension obligation.
Which improves our adjusted debt position with the rating agencies.
The extended funding timeframe permitted under the American rescue plan together with the modification of interest rates stabilization rules.
Means that we do not expect any funding requirements for the foreseeable future.
Assuming our plan achieves a seven 5% expected return on assets.
Although we plan to make contributions into the pension next year. This legislation provides us with additional discretion and flexibility to make voluntary contributions as we assess our capital allocation plans.
As Steve mentioned discussions have begun with the department of Justice.
While no contingency has been reflected in our consolidated financial statements.
We believe that it is probable we will incur a loss in connection with the resolution of this investigation.
However, we cannot yet reasonably estimate the amount.
Finally last month, President Biden introduced the American jobs plan.
Which includes a corporate tax increase and proposed minimum tax.
As well as potential opportunities related to proposed infusion into the electric vehicle infrastructure and the energy grid.
Clearly, it's very early in the process, but the corporate tax provision could be slightly cash positive for us if implemented in its current form.
Our solid first quarter results and expectations for the year reflect our strong operating fundamentals and the continued success.
Of our strategies to modernize and enhance our distribution and transmission systems.
As we move our company forward, we are laser focused on unlocking opportunities.
And increasing value for our shareholders customers and employees.
Thank you for your time now, let's open the call to your Q&A.
Thank you.
Now we will be conducting a question and answer session and you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question queue you.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Michael <unk> with.
Goldman Sachs. Please proceed with your question.
Hey, everybody. Thank you for taking my question.
I'll quickly this phone is probably for John.
Your prior guidance some disclosure before the act passed in March of this year that impacts pension assumed pretty sizeable pension funding requirements in 2022 and beyond <unk> you are no longer making those pension funding requirements why wouldn't be equity funding requirements go down in lockstep.
Well Michael I appreciate the question at least from my perspective.
Equity is an important part of achieve.
Achieving our targeted <unk> to debt of 12% to 13%.
So if it's not used to.
Pay down pension obligations it would be used to pay down other balance sheet related debt. So we are laser focused on improving the balance sheet getting it up to that 12%, 13% and equity is a key component of that.
Okay.
Other words, what you're basically saying is you are saving cash from not having to make pension requirements.
You are looking to Delever like you recognize hey, we need to Delever, where more levered than our peer group, let's delever reduce the risk profile clay for the higher ratings from that.
Alright got it.
Alright, Okay. That's right if you look at where we're going to be this year.
Somewhere around 10 to 10, 5% <unk> to debt that's not acceptable for us we want to be at the 12% to 13% and then have a plan to improve going forward.
Got it makes a ton of sense. Okay. One follow up you all gave great detail on a lot of the distribution capex projects or potential projects, meaning state by state et cetera.
Im struggling a little bit to understand is aligning that detail.
With what's actually in your Capex guidance on the distribution segment, meaning.
Are things that you filed for say day.
Paul.
In Pennsylvania.
On the project in New Jersey granted that one kind of small what's in guidance in which of these are not in guidance or are these all upside to guidance.
So Michael I would tell you that some of the filings that we've made that have not been approved or not in our capex forecast currently so that would be upside to the capex programs. What we have that's in our forecast now are those items that have been approved.
Other than I think in 2022 and 'twenty three we do assume that we're going to roll into a grid mod to program.
So I think that would be the only item out there.
That's in our forecast that has not been approved.
Yes that is correct.
Yes.
Im sorry, Michael Thats in Ohio grid Mod to on Ohio right.
Okay. Thank you guys much appreciated.
Thanks, Michael.
Thank you. Our next question comes from the line of Steve Fleishman with Wolfe Research. Please proceed with your question.
Yes, hi, good morning. Thanks.
So just a question on your comments on Ohio.
Regulatory updates so.
Last call you talked about pursuing kind of.
Gold comprehensively.
Resolve all regulatory issues in Ohio.
And then it sounds like on this call you are now officially engaged in settlement talks on the seat.
Hughes.
Both both backward and looking forward is that correct.
Yes. Good morning, it's Eileen Mikkelsen Im Vice President of Rich and regulatory affairs. Thanks, Steve for your question.
Having engaged with a broad range of parties in Ohio.
And open transparent kind of constructive discussions about a whole range of issues that are pending in Ohio, We had our first broad based meeting on March 31.
This past quarter.
Very well attended represented by folks that represent really all of our customer groups and in the course of that discussion. We are talking about the quadrennial review the suitcases, Paul historical and prospective as well as many many other matters I would say that in the course of those discussions I think the part.
<unk> expressed to us generally an appreciation for the approach that we were taking in Ohio to resolving these matters and also gen.
Generally an appreciation for the actions that the company has taken to date.
Tayo to move past the issues that we currently face.
Okay.
So.
To put it another way you put out the olive branch too.
Have these discussions and it does appear that the parties.
The key parties at least are willing to.
Talk.
And then when the settlement talks of these various issues.
Yes, Steve I want to be sensitive to the ongoing discussions but at the end.
We felt good as a team.
The level of engagement and as we had talked through on our prior call part of this for US is a listening tour right just to listen to the various constituencies.
Work to understand where we can find common ground and I think that process is often running just as we had committed to.
Okay.
And is this something that is.
Because I don't think its been something thats come up in any of the sockets for those all those different cases. So is this something that's going to continue on costs outside the dockets of the cases.
I think the conversations with the parties will continue ultimately if there is resolution of matters related to specific dockets that resolution would be posted to those dockets, but.
Conversations are outside of the formal proceedings at this point.
Great. Thanks, one other.
Question just for John on the.
Equity alternatives that you're that you talk about reviewing for that does that.
The only thing I can really think of that would maybe fit that would be would.
Would be asset sales.
And maybe you could just talk about if you are reviewing what would be your.
Objectives, just like lower cost less dilution or would there be other like strategic.
Things that you might be looking at.
If you are reviewing asset sales.
Yes, Steve I mean, I guess the way I think about it there are many different alternatives to raise equity capital that would be much more accretive than issuing common equity for instance.
Like the Duke, Indiana transaction that was announced earlier this year on.
Obviously, it would have to be in line with our balance sheet priorities.
Our focus on long term customer focused growth.
Yes, we're looking at a range of options to maximize value given our equity needs.
Okay, great. Thank you very much.
Yes.
Thanks, Steve. Thank you. Our next question comes from the line of Julien Dumoulin Smith with Bank of America. Please proceed with your question.
Hey, good morning, everyone. Thanks for the time and the opportunity.
Perhaps.
If I can follow up on the last couple of questions first.
Can you elaborate a little bit more on what we could expect out of any resolution in Ohio.
I know you provided some framework about how you are engaging with stakeholders, but what would you expect to the extent.
Successful over here I mean could this be more than just resolution of the <unk> for instance.
Any additional color would be appreciated as well.
On the deferred prosecution agreement is a prerequisite I suspect not but I just wanted to ask that explicitly.
Secondly on an ongoing to address the regulatory discussions and then I'll defer to others on that question with respect to that.
Deferred prosecution agreement, but with respect to the settlement we are as Steve said, we're engaged in kind of eliciting exercise our first meeting we spent.
Really just listening to all the parties what areas where on the interest to them and that address a broad range of issues beyond necessarily the seat in the quadrennial review cases, so we're going to continue to let that process play out it's a little too early to call what the outcome will day, but we are committed to it.
Being as open and as transparent as we can be throughout the process.
<unk> and trying to react to what's important to the other parties.
Yes, Julien on.
On your second point I would like to just separate.
The potential for a deferred prosecution agreement from anything that we're doing in Ohio, that's the way on viewing it right now.
And let me just spend a moment on the developments with the department of Justice because I suspect I'll get a question later, even but the resolution discussions that we spoke of today are constructive and they are a positive development for our company.
As for the details of timing.
On the potential for fines or penalties.
I really can't speculate on that at all and I, just do want to say, though.
I'm encouraged by our dialogue and I am encouraged that we are certainly going to continue to fully cooperate with the department of Justice.
I just want to be very respectful of their process and not get ahead of it at all.
Yeah.
Okay understood if you don't Mark.
Can I clarify the last question I think you were responding to Mike here on.
The <unk> to debt metrics, and where you stand today versus prospectively could you talk about this <unk> increase here of $150 million to $200 million.
Annually.
In <unk> off of 2020 through 23, now and then you talked about adjusted debt being relatively flat we should.
Shouldn't that sizable itself already address the delta that you need to get back to where you on in your credit metrics.
I just want to understand where the starting position when youre thinking about any equity alternatives or incremental equity beyond whats already on the plan on $600 million.
Well, Julien I would say that our adjusted debt levels remaining relatively flat assume up to $1 billion of equity.
So thats part of the plan to keep.
Our adjusted debt relatively flat to where it was at the end of 2020.
And then from <unk> perspective on manager.
If you are.
If 60% of your Capex program is on Formula rates.
Youre going to see some slight low benefits over the next two or three years as industrial and commercial come back.
We have the <unk> rate case, that's going to be.
Implementing new rates at the end of this year, that's going to be cash flow positive at the end of this year into next year, So that's really going to be driving.
That incremental <unk> of up to $150 million to $200 million a year for the next few years.
So if we keep our adjusted debt level, then naturally youll grow into that 12% to 13%.
Right.
Status quo Youre already on track to get back to where your metrics need to be and we should be thinking about any incremental equity is addressing any incremental needs that might not come out of the organic business, but rather specific to funding requirements with EPA or otherwise.
Correct correct.
Excellent. Thank you for clarifying that guys have a great day.
Thanks Julien.
Yeah.
Thank you. Our next question comes from the line of Jeremy Tonet with Jpmorgan. Please proceed with your question.
Hi, good morning.
Good morning.
Just wanted to shift.
Gears a bit here, if I could and.
With the buying infrastructure plan granted it's very early innings and things.
Kind of changed shape over time, but just wondering at this stage what do you see the.
The opportunities for FTE at this point if the plan were to come to fruition as kind of broadly proposed right now.
Well I think there is there is potential for our company very clearly we have.
Being a fully regulated transmission and distribution company.
On a five state area with a diversity of assets that we have that may well be impacted of course in the transition in whatever form it takes to cleaner energy.
We will certainly benefit our company and I think we're well positioned for that.
I believe there is other factors that will come into consideration is the administration.
Goes through the necessary next steps.
We have to have a very thoughtful transition.
Embedded in this plan there are economic impacts potential reliability impacts for the T&D systems that we want to stay mindful of and look the issue was not going to go away climate and some of the planning in United States is progressing forward and we all have to do our part.
Part.
As you look at the overall goals and you look at our ESG greenhouse greenhouse gas reduction goals.
We have already placed out there our goal of a 30% reduction in carbon from 92019 levels by the year 2030, and we are on our way to achieving that and we have a carbon neutrality go goal in.
In 2050 so.
I think our goal our business plan our strategy as is consistent with what the <unk> administration proposed but I think there is a lot of work to do to take it from a policy statement to on the ground improvements.
Got it that makes sense and then turning over to FERC.
It seems like there's possibly some developments there on the RTL side and was just wondering if you could provide any thoughts that you have there on on that broadly speaking and what impacts that could have to FTE.
It's happening.
Yes happy to address that question. Thank you.
Yes, when we look at the impact if in fact with this supplemental no further that FERC issued which really.
Maybe puts to rest on tissue of the 50 basis point in furnace that transmission organizations have been given for participation in our Trs we quantify that it's probably between four and five cents for us on a total basis across all our transmission organization, but I think it's also on.
Important to recognize this is just on a supplemental notice of proposed rulemaking has to go.
Through a comment reply comment period, and then take FERC action and I would also point out that at the same time FERC really initiated.
Technical conference with respect to transmission incentives related to performance ratemaking shared savings mechanism in order to Incent transmission in that meeting scheduled to occur in September of 2021, So I think theres. Some puts and takes on what may happen with transmission ROE vs and of course as you might.
Expect we're going to stay very actively engaged on all of those discussions.
I think thats excellent on Eileen and I would just add obviously our transmission business is very important to our strategy.
Eileen outlined.
On the four to five is a concern obviously, we'll monitor it but it's not enough to.
Throw a company off track certainly.
We also have the advantage as a company to as I stated earlier, we have a very large footprint of <unk>.
Diverse transmission and distribution assets.
In which we can invest in multiple opportunities should this development become a little bit more impactful to us.
That's really helpful last one if I could real quick here with regards to equity alternatives as you kind of touch on there and looking at where recent Aston asset sales of treated is there any reason you would issue equity at these levels instead of an asset sale and given how the plan is for $600 million next year should we expect kind of more.
<unk> news on that front sooner and if if it takes a period of time to execute a sale. If you do choose to go that route.
Well, Jeremy I think Thats one of the reasons, we're looking at a trade like that I mean, if you just take that Duke Indiana forward multiple it's like issuing common equity at $50 a share.
And so you have to take a look at those types of options. When you have an equity need like we do.
So I think thats one of the reasons we are looking at.
Something similar to that type of transaction.
Got it that makes sense that's very helpful. Thank you.
Thank you. Our next question comes from the line of Steven Byrd with Morgan Stanley. Please proceed with your question.
Hey, thanks for the really thorough update.
Just a couple of additional questions for me.
On governance.
I understand you are sort of under revision on your.
The entire approach you mentioned more limited involvement in the political process I'm wondering if you could just add a little bit more color on.
Unless it's sort of premature given your sort of under review now.
Well as you said Steven it's under review, we are integrating our thinking in terms of formalizing our revised political activity policies. So that's currently under revision in the interim.
I thought it was very important for our company to take the necessary actions that we did in terms of.
<unk>.
Ceasing, giving the 501 C fours as an example.
Activity that we talked about in terms of no disbursements out of our political action Committee, we are taking a deep breath.
Putting a revision together that makes sense that will help define that limited scope in the political arena and the way I view it as Youll see increased openness and transparency in what we're involved in a.
Accountability around that and we are going to get involved in things in which I could sit down and talk to any of my employees about or any of our customers about for example, because it would make sense for our company to engage in it for the <unk>.
The betterment of all stakeholders and that's just my current view right now there'll be more to come as we really stand up our new compliance.
John Summer holders spoke of but that's just our current thinking right now.
That's really really helpful color and then just one other question for me.
Just in terms of the internal investigation. The review that you've been going through would you characterize that as sort of broadly complete in terms of sort of stack finding determining just going back through and understand everything that happened or would you say theres sort of significant additional work needed to to kind of complete that investigation.
I think the good good news. This is John summer holder is that since the last earnings call. The investigation has not revealed any new material issues.
We are now transitioning that from proactive investigation.
<unk>.
On the investigation that will continue to cooperate with ongoing government investigations. So so that transition has occurred.
Is it correct.
Okay.
That's very helpful. That's all I had thank you very much.
Thank you. Our next question comes from the line of Andy stores and Steven.
Global Securities. Please proceed with your question.
Thank you Steve you mentioned that there is.
On a separation between the Doj negotiations on.
What's happening now.
Oh.
And then again.
It seems like.
Remember, the Ohio, Anthony Generalist model standstill agreement.
Me.
I think I await the outcome of Paul.
Dr. James.
Michael patients. It seems like you guys are waiting with issuing debt.
Sure.
Lisa <unk> and Toledo.
Again in anticipation of a potential Doj settlement.
Yes.
I'm just just wondering James.
Fair assessment on.
What's happening.
Angie the way I would look at it is we have certainly a lot of moving pieces here that we have to coordinate appropriately.
On to the extent.
We're going to.
Deal with and fully cooperate with the Doj in my view, that's one work stream that we're working on.
The all the activity that we have in Ohio, which I find can.
Encouraging, but we have a lot more work to do there thats a separate work stream, we have multiple others that we're working through the way I would look at it is to the extent that that may or may not influence our.
Financing plan, we just integrate that into the way the pieces are moving for us.
Once again, John Taylor outlined the success that we've had in the markets.
And I think we are all with all the moving pieces. We have we're in a stable environment with regard to all of that so I guess, that's perhaps my best way to approach your question.
Okay and separately.
Thank you for the additional disclosures on the back book.
Great.
Great I appreciate it.
The things that you guys mentioned there is that you are considering distribution rate cases in all of your jurisdictions, which I think.
On the Ohio, So so far you've mentioned.
As the.
On the issue that is being discussed with different intervenors, and Ohio, how about signing.
Traditional rate case, R&D and sales.
Yeah.
Well I think yes, I wanted to remind folks that January 1st of this.
This year, we actually implemented our JC P&L distribution base rate case settlement, John mentioned, how that will be accretive from a cash perspective, starting later this year.
<unk>.
I think last week CRC approved our JC P&L transmission forward looking formula uncontested rate sat on that.
Beginning January one of this year, we moved our remaining transmission assets to a forward looking formula rate subject to hearing and settlement procedures.
We are scheduled to have a rate case filed in Merrill Lynch for our Potomac Edison either first quarter of 2023, and we're on schedule to file for our three Ohio companies by the end of our ESP, which is may of 2024, and so beyond that we are continually evaluating how our COO.
Stack up against our revenues to make judgments about if and when it would be appropriate to seek base rate cases.
Okay. Thank you.
Thanks Angie.
Thank you. Our next question comes from the line of <unk> Chopra with Evercore ISI. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my question here.
Just wanted to clarify something John in your commentary you mentioned.
Removal of a material weakness.
Driven by the actions you are taking on the governance front is that sort of audit.
Auto driven requirement or is that something that sort of youre working with in tandem with credit agencies.
Alright.
<unk>.
Well I would tell you that this is John Taylor, we have to John's on the call.
I'll take the first piece of it and then if there is a.
Some follow up to John Summer holiday, and we can do that as well, but I do think.
The material weakness is important to be remediated as part of our.
Steps around the culture and around the tone at the top.
<unk> governance and compliance.
So I do think.
We spoke a little bit with the rating agencies about the plans around the material weakness. So I do think that's important to them, but it also I think what's important to them is just more broadly.
The enhancements that we want to make to the compliance program.
Yes, Joe this is John sharp on hold or just to follow up on that.
On the set of recommendations and if you look on the Fac book on pages eight and line.
Those are things that we're pursuing in combination with our <unk>.
Subcommittee of the.
Compliance subcommittee of the audit Committee.
Those are the type recommendations that address.
A number of issues related to having best in class compliance ethics and compliance program. That's very important to US we were putting a high priority on that but then that will allow our internal.
Yes, Jason and the internal folks as well as our external auditor to then work through the issues related to the.
The material weakness Thats why we indicate that we have a plan both to implement those recommendations and deal with the material weakness that we anticipate will allow us to deal with remediate the material weakness by the time, we file our fourth quarter.
Q.
Okay.
Announce our fourth quarter earnings.
Yes.
Understood. Thank you just just a quick follow up to that is there sort of Tom and I think you can sort of touch on this in your prepared remarks, but is there sort of a roadmap.
Or sort of boxes, you need to check in terms of actions you need to take from a governance standpoint for the credit rating gaining agents to get more constructive on this shared sort of any qualitative or quantitative information with you does that effect.
Yes, we're working through that bearish right now with them I mean, I think they're going to want to see.
US Institute some of these enhancements that we've laid out in the fact book around governance and compliance.
As well as maybe some of the detailed controls that we've implemented around disbursements.
That we spoke of in our prepared remarks, they want to be sure that this type of issue will not happen again.
That we have the control structure that culture.
To ensure that this type of issue will not happen again, whether we built the controls and the culture.
That would prohibit that type of.
Those types of issues, so I think.
There'll be focused on those types of issues.
Understood I appreciate the color guys. Thanks for the time.
Thank you. Our next question comes from the line of Paul Patterson with Glenn <unk> Associates. Please proceed with your question.
Hey, good morning.
Good morning.
Just on the <unk>.
And I apologize for this but the decoupling.
I think it was a 10 cent impact on the.
On the quarter.
And I was wondering if I was reading that correctly and just sort of.
Walk us again through what the impact for the years is supposed to be sort of.
Yes, so Paul just just if you think about last year decoupling was implemented in the first quarter. So there was an adjustment.
In the first quarter to true up 2019 revenues to the day.
Decoupling level, so that was a piece of it.
The other piece of it on that was fairly significant was the fact that in 2020. The temperatures were very very mild and so the decoupling.
Adjusted for for the mild temperatures and the input and the impact on load and then a smaller piece was was the loss distribution revenues.
That we're not pursuing collection on so that those are the components that made up the <unk> that kind of like <unk> <unk> <unk> kind of thing I think going forward in the second quarter Youll, probably see a <unk> <unk> headwind and then in the.
Third quarter, it'll be a <unk> <unk> headwind and then obviously when we get into the fourth quarter. That's when we took.
The charge associated reversing all of that and so that will flip for us okay. Okay great.
Then.
Just back to the 501 C for stuff.
Is that.
Isn't clear whether or not.
How much of this is permanent or not.
And.
Part of the statement seems to be a pause on the on the pack stuff and then I just wasn't clear is the 501 C. For policy that you guys are implementing is that a.
Perceive to be a permanent impact.
More or less than that.
And if so kind of is there a benefit from.
In terms of participant actually speaking in terms of not.
Not distributing that.
Paul the way I would put it I'm sorry.
I apologize go ahead.
The way I would put it is that decision is currently under under review.
With our company.
500, <unk> when you look at it there is a societal benefit component to it and which.
You can help community based organizations.
Other component of it the way I look at it as the political end of that spectrum and that certainly.
On an area that we are not going to participate in period. So as we work this through.
Our going forward measure will be not to contribute to 501 C fours.
Okay and is there any when we take all of this stuff into account what have you is there any significant financial impact.
<unk>.
I've seen depending on different companies that have significant.
On a number sometimes is there.
A potential.
Economic benefit that we could see as a result of this that's worth mentioning or is it still under minimal or.
No Paul I would not look at it in that way.
I would look at it is look we're going to continue to be an.
An excellent corporate citizen and helping the communities and our customers in the areas in which we work and live with them and.
And Thats the way view.
<unk> are giving levels going forward, a large part of it so there won't be a large financial impact or embedded savings I would say.
Awesome. Thanks for the clarification. Thank you okay. Thank you Paul.
Thank you. Our final question. This morning comes from the line of Charles Fishman with Morningstar. Please proceed with your question.
Thank you Tom batting cleanup Paul.
Just one question on France.
Uh huh.
Sure.
On our forecasted investment.
100 volume.
On one lowered the bottom of the range.
Great.
My question would be.
Is that reduction.
Perfect.
Is it.
I wanted to see a little more clarity on some of the FERC faces.
Is it balance sheet enhancement youre slowing down the investment or I guess before.
Maybe I'll have Bob.
Is it to do with the buyback plan of $100 million in transmission and what impact on one opportunity.
Or.
The regulated transmission.
Yeah. Charles this is Jon so youre right that we did adjust some of the capex programs and transmission.
That was mainly associated with the forward program.
That we're rolling out some of that will impact transmission.
As we look to lower our overall cost structure and become more efficient as we transform the company.
We will consider.
Ramping up Capex once we get clarity around.
The department of Justice investigation and outcomes. So that's why we kind of took it off the bottom end of the range on those future years to give us a little bit of flexibility. If we wanted to ramp up capital we could get more worked on.
With less money.
Got it okay I understand.
Lowering the range.
The $100 million this year or is that project specific Tom.
So it is it's not necessarily project specific but it is associated with restructuring some vendor contracts that we've had.
We've looked at some of the projects from a from a health perspective, and decided to pull back a little bit until we run it through on new process around asset health modeling.
Okay great.
Excellent real helpful. Thank you that's all I had.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Schall for any final comments.
Thank you I'd like to thank everyone for being with US today and your continued support our leadership team is committed to transfer transforming firstenergy into an industry leader that can deliver exceptional value to.
To our customers and shareholders and I hope, everyone stays healthy and safe and we'll talk to you all soon again thanks.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.