Q2 2021 FirstEnergy Corp Earnings Call
In other investigations related to house Bill 6.
And John Summer Halder will join us for a brief discussion on board activity and the progress of our compliance program.
I'll come back to review recent business developments and then John Taylor will discuss our second quarter results and other financial matters before we open it up to your questions.
Yesterday, we announced that we've entered into an agreement with the U S. Attorney's office for the Southern district of Ohio to resolve the Doj investigation into Firstenergy.
This deferred prosecution agreement was filed in federal Court.
Under the 3 year deferred prosecution agreement, we agreed to pay $230 million, which will be funded with cash on hand.
Half of these funds is designated for the U S Treasury and the other half is being directed to the benefit of utility customers by the Ohio Development Service Agency.
No portion of the fine will be recovered from customers.
We also agreed to the government singled charge of honest services wire fraud.
Which will be eventually dismissed provided we abide by all of the terms of the agreement.
In accordance with the agreement we will provide regular reports to the government regarding our compliance program as well as internal controls and policies.
And continued efforts to build on the comprehensive compliance initiatives, we've rolled out this year.
And its decision to defer prosecution the U S. Attorney's office acknowledged our substantial cooperation with the investigation along with our significant remedial actions which include.
Establishing an executive director position at the board level as well as our compliance focused board subcommittee.
Hiring a new chief legal officer, and a new chief Ethics and compliance officer.
Working to establish a culture of ethics integrity and accountability at every level of the organization and reviewing and revising political activity and lobbying and consulting policies, which will include robust disclosures about our lobbying activities.
The conduct that took place at our company was wrong and unacceptable.
Our board the management team and the entire Firstenergy organization have done extensive work and are committed to make the necessary changes to move on from this.
Our progress on these efforts along with the DPA demonstrate that we're making meaningful headway in navigating through this period and we are positioned to move forward as a stronger integrity bound organization.
We will continue to cooperate fully with the ongoing investigations audits and related matters as we work to resolve these issues and rebuild trust with our employees customers regulators and investors.
We are intently focused on fostering a strong culture of compliance and ethics and assuring that we have robust processes in place designed to ensure that nothing like this happens again.
In May we held our first compliance town hall with employees to discuss what compliance ethics and integrity mean at Firstenergy.
And the importance of building a culture of trust, where everyone is comfortable with speaking up when something doesn't feel right.
In the weeks following the town Hall, our management team has responded to employee questions and concerns and we are committed to continuing this conversation and engagement.
Next week, we plan to hold another town Hall meeting with employees, where we will introduce our updated mission statement reinforcing the role of uncompromising integrity as the cornerstone of Firstenergy is identity and business strategies.
We will also refresh our core values to better reflect the importance of integrity.
Together with safety.
Diversity equity and inclusion.
Performance excellence and stewardship.
These values will be embedded in our practices and processes and become ingrained in the way we work.
Additionally, we updated our code of business conduct which John Summer Halder will speak to in a moment.
We also continue to strengthen our leadership team with 2 more new hires.
Michael <unk>, who joined US earlier this month as vice President internal audit and yesterday, we announced that <unk> <unk>.
Has been named Vice President and Chief Risk Officer effective August 16.
These 2 experienced professionals represent another important step as we strengthen our key internal functions and I am confident that they will help us develop best in class audit and enterprise risk programs.
Now John Summer Halder will join us to provide an update on board matters and other facets of our compliance program, then I'll be back to discuss FTE forward and review some regulatory updates.
Thanks, Steve.
Progress with the Doj it builds on the substantial steps, we have taken to enhance our board.
<unk> our leadership team to ensure we have a best in class compliance program and significantly modify our approach to political engagement as we work to regain the trust of our stakeholders.
I'll start with a review of recent board changes.
As you know Jesse Lynn and Andrew T. Now joined the board from Icahn capital in March, but they do not currently have Vod rights pending regulatory approval.
I am pleased to note that FERC approved our request for voting rights last week.
Our process in Maryland continues as we have communicated Ferc's recent action to the commission.
Now with Williams was elected to the board at our annual meeting in May and last month, we added 2 more independent directors.
Winston Hicks and Paul Kalana.
Jesse Melbourne lease and Paul comprise our special litigation Convention.
This committee has full and binding authority to determine the company's action with respect to the pending shareholder derivative litigation.
I'll also note that with the formation of the Special Litigation Committee.
Board has dissolved as demand review committee.
As previously discussed the company's internal investigation has now been transitioned from a proactive to a response model and in light of the significant review investigation and related actions accomplished by the Independent Review Committee.
Board has also dissolved that commodity.
With many proactive actions taken by the board and management over the past year have improved our governance and put us in a strong position to remediate the material weakness associated with our tone at the top by the time, we file our fourth quarter results.
Over the last several quarters, we've talked a lot about the work we're doing to elevate our ethics and compliance program and reinforce our values and expectations with all employees.
We continue to make timely progress in this area and our new more centralized compliance organization is taking shape under Antonio Hernandez, who joined the company in April as our Chief Ethics and compliance officer.
Yesterday, we published our updated internal code of business conduct the power of integrity.
Which will be supported by ongoing education around behaviors and the importance of reporting ethical violations.
And we have continued to strengthen our policies processes and internal controls, including those around 501 C force other corporate engagement and advocacy and business disbursements.
While the transformation of our culture and our steps to restore trust with all stakeholders will be long term endeavors. This team has started building a stronger company built around the foundation of ethics honesty and accountability.
Now I'll turn it back to Steven.
Thanks, John.
The comprehensive assessment and Recalibration of our ethics and compliance program has been running on a parallel path forward, our transformational effort to enhance value for all stakeholders by investing in modern and distinctive experiences that will improve the way we do business.
We have improved our programmatic efforts to mature our ethics and compliance program into the <unk> forward work in this way, we can leverage <unk> forwards rigor to implement changes quickly and efficiently.
Embed ethics and compliance into our operational culture, and ensure we sustain our comprehensive transformation well into the future.
FTE forward has entered its third phase, which is a full scale effort to execute our implementation plans. The program is expected to deliver value and resilience.
Including cumulative free cash flow improvements of approximately $800 million.
From 2020, 1 through 2020.3.
In an annual run rate capex efficiencies of about $300 million in 2024 and beyond.
At the same time, we expect the program to build on our strong operations and business fundamentals as we reinvest a portion of our efficiencies into strategic opportunities to better serve our customers and support a smarter and cleaner electric grid.
To ensure our organizational structure supports these improvements over the long term, we realigned our business units last month around 5 pillars.
Finance and strategy human resources, and corporate services legal operations and customer experience.
This new structure reflects our best in class model and supports operational excellence clarity in decision, making and accountability.
And less complexity.
As part of this new organizational structure, we've created a customer experience function that will truly understand our customers' evolving expectations. So we can develop solutions and drive benefits to customers.
We've also created a new position Vice president transformation to Shepherd the forward initiatives across our company, while also developing customer focused emerging technology opportunities.
The development of executable plans are best in class compliance program and critical organizational changes will position the company to move forward in a positive sustainable direction.
I'll just take a moment now and review recent regulatory matters starting in Ohio.
First in July the PUC approved our filing to return approximately $27 million to our Ohio utility customers, representing all revenues that were previously collected through the decoupling mechanism plus interest.
Our Ohio utilities have filed supplemental testimony in the quadrennial review of our ESP for.
We are committed to working with a broad range of parties in Ohio to resolve the range of issues that are still pending here.
We held our first full scale collaborative meeting on March 31.
And have since received further feedback from participants.
We are preparing for another collaborative meeting in the next few weeks.
We are also working through regulatory audits in Ohio, New Jersey, Pennsylvania and.
The FERC.
Finally in April the.
The New Jersey, Btu approved <unk>, 3 year $203 million energy efficiency and conservation plan, which includes a return on certain costs as well as the ability to recover lost distribution revenues.
As for our financial results, we're pleased with our strong performance in the first half of the year.
We are reaffirming our 2021 operating earnings guidance of $2.40 to $2.60 per share.
And we expect to be at the top half of that range.
We're also introducing third quarter guidance of 70 to 80 per share.
We remain focused on executing our plans maintaining our cost and building on this positive momentum.
We are making substantial progress to transform firstenergy live up to our values and deliver long term value to all of our stakeholders.
Thank you for your time and now I'll turn the call over to John Taylor for a review of second quarter results and a financial update.
Thanks, Steve and good morning, everyone.
Yesterday, we announced GAAP earnings of <unk> 11 per share for the second quarter of 2021.
And operating earnings of 59 per share.
As Steve mentioned this exceeded the top end of our guidance range.
Special items in the second quarter of 2021 include investigation and other related costs, which included the impact from the deferred prosecution agreement as.
As well as regulatory charges and state tax legislative changes.
And our distribution business too.
2021 second quarter results as compared to 2020.
<unk> growth from our capital investment programs rate increases.
And lower expenses, primarily related to the absence of pandemic related expenses.
We incurred in the second quarter of last year.
Partially offset by the absence of Ohio, decoupling and loss distribution revenues in the second quarter of 2020.
Which we stopped collecting earlier this year.
Total distribution deliveries increased on both an actual and weather adjusted basis compared to the second quarter of 2020.
When many of the pandemic related restrictions were in full effect.
However, the mix of customer usage resulted in a flat year over year earnings impact.
Second quarter 2021 weather adjusted residential sales were 6% lower than the same period last year. When many of our customers are under strict stay at home orders.
However, as we look at trends weather adjusted residential usage over the past few quarters has been on average.
About 4% higher than pre pandemic levels and in fact, the second quarter of this year was close to 8% higher than weather adjusted usage, we saw in the second quarter of 2019.
We think more permanent work from home initiatives could impact our longer term load forecast and.
And we will be watching closely to see if this structural shift in our residential customer class continues.
Weather adjusted deliveries to commercial customers increased 8% and industrial load increased 11%.
As compared to the second quarter of 2020 day.
Despite the increase in commercial activity this spring weather.
Weather adjusted demand in this customer class continues to lag pre pandemic levels by an average of about 6%.
Looking at the industrial class, we are encouraged by the steady recovery in demand over the past year.
This quarter industrial load was only slightly down compared to the second quarter of 2019.
We continue to see higher loan from the shale gas industry, but that was offset by lower load and other industrial sectors, such as steel auto and mining, which have not fully recovered to pre pandemic levels.
And our regulated transmission segment higher net financing costs in the second quarter of 2021, primarily related to our revolving credit facility borrowings.
Were more than offset by the impact of higher transmission investment at mate and Nazi related to our energizing the future program.
Our transmission investments drove year over year rate base growth of 7%.
And in our corporate segment results reflect the absence of discreet tax benefits recognized in the second quarter of 2020.
As well as higher interest expense.
For the first half of 2021 operating earnings were $1.28 per share.
Compared to a $1.23 per share in the first half of 2020.
This increase was the result of continued investments in our transmission and distribution systems.
Weather related sales and lower expenses.
And consistent with our second quarter results.
Positive drivers for the first half of this year more than offset the absence of 13.
Decoupling and loss distribution revenues that were recognized in the first half of 2020.
But are no longer in place this year.
Additionally, our continued focus on financial discipline together with strong financial results helped drive a $196 million increase in adjusted cash from operations versus our internal plan.
And a $264 million increase above the first 6 months of last year.
Building on the improvements we noted on our first quarter earnings call.
As for capital markets activity.
We continue making good progress on this year's debt financing plan with 5 of our 6 debt transactions complete.
All with pricing similar to investment grade companies.
In May we issued $150 million in senior notes at Toledo, Edison and Mei.
With pricing at 265% and 255% respectively.
And in June we issued $500 million in senior notes at JC P&L debt priced at 275%.
In addition, we made progress on our commitment to reduce short term debt during the second quarter by repaying $950 million under our revolving credit facilities.
Bringing our borrowings down to $500 million as of June 30.
And earlier this week.
We repaid the remaining $500 million under.
Under these facilities.
While we did obtain a waiver for our credit facilities related to the DPA.
This repayment was voluntary and not required by the bank group.
We plan to operate on a normal course going forward.
And we'll utilize the revolving credit facilities on an as needed basis as we have done historically.
As you know we have 2 revolving credit facilities, 1 for Etsy Corp, which is shared with our utility companies and 1 for FEP both.
Both expiring in December of 2022.
Over the next few months, we plan to work with our bank group to evaluate and refinance these bank facilities with the goal of completing this initiative before the end of the year.
And finally, we continue to consider alternatives to our equity needs.
We continue to think through options that include and minority sale of distribution <unk> transmission assets.
Which would raise substantial proceeds and eliminate all of our expected non sip equity needs.
Ensure the execution of our balance sheet improvement plans and provide funding for strategic Capex and customer focused emerging technologies that's the.
Port the transition to a cleaner electric grid.
Based on our current timeframe, we expect to provide you with an update in the fourth quarter.
As always thank you for your time and your interest from Firstenergy.
I'd be happy to take your questions.
Thank you at this time, we will now be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad.
Formation tone will indicate your line is in the question Kim You May press star 2 if you'd like to remove your question from Mccann 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 Shah <unk> with Guggenheim Partners. Please proceed with.
With your question.
Good morning, Steven John Hey, Joan.
Yes sure.
<unk>.
So just.
Just on the asset sale, obviously kind of mentioned you are still exploring options, even though sort of the DPA came in lighter than expected than you expected is.
Is the main consideration here is it I'm just trying to figure out is it potential shareholder litigation is it kind of to capture some of the multiple arbitrage opportunities with what sort of infrastructure in various strategics have been willing to pay for assets recently.
Have your base I guess equity needs increased.
And then just as a follow up media has reported Mon powers the potential sale options. So can you maybe just confirm.
What state is noncore to the overall enterprise.
We should maybe think about potential sizing of a smaller utility like Mon power versus the minority stake versus a potential larger optimization like let's just saying JC P&L as an example.
Sure. This is John so I'll take that and if Steve wants to add on.
Be happy to do that as well, but.
I think for us the priority is around ensuring that we achieve our balance sheet metrics.
We have goals of 12% 13%.
We likely will face some additional headwinds with.
Different types of litigation.
Got some things cooking in Ohio that we need to deal with.
And so providing some balance sheet support at.
At an efficient cost is the number 1 priority.
With respect to the different assets.
I'm not going to get into specifics, but I will tell you that we've made a tremendous amount of progress since the first quarter, we are getting more and more comfortable with the minority interest sale in 1 of our assets.
And we're fairly confident.
That that's the right path forward.
We think we can do this in a way that limits dilution to shareholders, but can raise a significant.
Amount of capital.
That would eliminate all of our current equity needs.
It would achieve our priorities around the balance sheet.
Provide funding for additional capex opportunities all acknowledging the fact that we have additional headwinds that we're going to face.
Got it so so near term credit and earnings accretive transaction correct.
Correct correct Michael.
And then just lastly from me and I'll pass it off to someone else I'm glad clearly we're moving we're starting to move past all of this which is a great great great signal here.
How do we how do we think about maybe the DPA statement of facts as it relates to the overall construct in Ohio.
Have a right agreement in place, but curious if this can even be revisited in light of the findings I mean have you had any conversations with the <unk> following the DPA more specifically.
Sure. This is Steve. Thanks for the question I think I'm going to start just with a few comments on the DPA and then quickly move to Ohio.
Yeah.
This is truly a humbling moment for our company in terms of.
The DPA the accountability that we stepped up and.
And took as a company.
So we're humbled by it but we do view it as a very positive step for the company with many more steps down the path to restore confidence and trust along the way within the DPA, obviously, we paid a significant penalty.
For accountability.
We take that on and acknowledge that.
We're also going to continue to stay very focused as a team.
To remain fully compliant with all the requirements of the DPA.
And fulfilling those requirements will be very very important for us as well as continued cooperation with the Doj.
Globally.
We believe this is really at an inflection point not only for me as the leader of the organization, but for our company in general we.
We have a great opportunity as we work through this challenge really to show that we can create a much better company.
At a much better path forward. So we're really looking forward to do that and you will see that change and it will be at its center.
Ethics and integrity at every level within this organization.
So I just wanted to make those statements.
The DPA as it pertains to Ohio.
It's a good question, we haven't collaboratively underway.
Now we've had 1 meeting we're hoping to organize another meeting within the next <unk>.
Several weeks, so we want to respect that process and that speculate too much but we're confident that we can make significant progress in terms of restoring trust and confidence in the regulatory process.
So it's our hope that we can put everything thats on the collective agenda for the collaborative on the table discuss it deal with it and be able to come up with a reasonable solution.
Relative to.
Our ESP for our base rate case question that we get from time to time I believe those are 1 of the elements that around the table that we're very willing to discuss.
I would also point back just a little bit chart to what we have accomplished in Ohio with regard to not pursuing lost distribution revenue the refund of decoupling, we have the reestablishment of the 2024.
Base rate case requirement and I think the DPA now that it's behind US we will open up more opportunities for a pathway forward in Ohio.
Terrific. Thank you so much and best of luck Steven in China.
Moving to the next phase I appreciate it thank you.
Thank you Sir.
Thank you. Our next question comes from the line of Jeremy Tonet with Jpmorgan. Please proceed with your question.
Hi, good morning.
Good morning.
I just wanted to ask.
I'll follow up with debt with I guess the update.
And fourth quarter here, just wanted to clarify that.
Is the fourth quarter update is that during the quarter or is that with fourth quarter earnings.
And it seems like it's a bit of a while off so just wondering is this like a formal kind of book ending announcement debt.
<unk> accomplishes everything at that point in.
Last part here I guess, if you're thinking about potential minority interest monetization and we've seen these.
Right valuation Mark is out there just wondering if there is.
How much you would pursue here weather is just solving all equity needs, including pension shortfalls what have you.
So Jeremy this is John so, yes fourth quarter.
So some time.
In the fourth quarter not the not the fourth quarter call, we'll provide an update on.
Our our plan for equity financing.
And so with respect to quantum we'll have to see.
I would tell you this.
Right now we have a $1 billion of non Sip equity in 'twenty, 2 and 'twenty 3.
If you just assume $40 a share that's about 12 and dilution.
If I saw 12 cents unregulated earnings at a 32 multiple that would be about $2 billion in proceeds.
Got it debt.
Hi.
Very helpful. There.
And then kind of shifting gears a bit I guess.
Towards the transmission just wondering if you had some thoughts on.
Federal infrastructure.
Planned, possibly here and that FERC some of the some of the different things coming out of there just wondering how he thinks about that and what opportunities that you see on the transmission side at this point, possibly expanding depending on kind of what happens out of D. C. There.
Well.
Very good question. Thank you. This is Steve I would say it represents an opportunity for our company based on what I've been able to see from the current administration.
We have over the course of the last 6 to 7 years developed a.
<unk> core competence competency in terms of being able to.
Construct transmission projects and be able to extract the value that's needed to support a reliable grid and I think that core competency now can be unleashed with any infrastructure plan that is developed and approved through.
The administration and Congress, so I see that as a very good opportunity for our company.
Got it that's helpful. I'll stop there. Thank you.
Thank you.
Thank you. Our next question comes from the line of Steven Byrd with Morgan Stanley. Please proceed with your question.
Hi, good morning, Thanks for taking my questions.
Good morning.
I wanted to just talk at a high level in terms of your your business and the potential for the need for additional grid upgrades improvements transmission spend.
Just as you're thinking at a high level I know theres been a lot of focus on.
So on on addressing this Doj investigation.
But just now that we're hopefully in a position to be able to look forward to debt. How do you see sort of the potential areas of growth and maybe particularly what areas of growth are you. Most excited about in terms of adding to the base plan, but what might we see over time.
Well, Steve I think we have a.
We have an excellent.
<unk> business plan lets just start there are our transmission spend if you call. It a 1 billion to $1.2 per year.
That's a very sustainable pipeline of needed work that will span. The next 2 decade period.
So we're excited about the infrastructure program that might be coming forward, we're excited about leveraging our transmission system and embracing renewables.
They approached the system is an opportunity on the distribution side of the house I'm, particularly excited about some of the programs that we have going on right now with.
Smart grid smart meter programs.
I also believe that our company as well as the utility industry can play a central and key role relative to the infrastructure build out for electric vehicles battery storage and other emerging technologies. So I think that all represents.
Great.
Opportunity for us.
I also tried to keep the customer in the center of that equation. So as these emerging tech now technologies or lowering in costs.
I think thats good for customers and once again, I think a company like ours could.
Install these technologies in the best way possible on the T&D system to maximize their value at a low cost.
That's helpful and as Youre thinking about sort of your growth plans from here is there a natural sort of process that the firstenergy would go through and sort of just continuing to reassess those types of.
Additional needs. So for example is there sort of a planning process in the fall followed by.
To some degree you have an update we could expect next year in terms of just your youre thinking on on where you go from here from a growth perspective.
Yes, Steven this is John.
There's a couple of things that we need to work through.
Before we move to providing long term guidance, obviously, we have.
There are some issues that we need to resolve in Ohio.
We have probably 5 to 6 different proceedings.
The collaborative that we're working through so we need to really have some clarity around.
Our Ohio utilities.
And then I think we also need to have a little bit more clarity and certainty around our equity plan.
And then once we have those 2 things I think we can get in to providing more of a long term.
Long term guidance range for you.
Very fair point last question, just maybe going back to the deferred prosecution agreement. There's a lot of commitments here I was just curious as you think about factoring these types of commitments into things like executive compensation changes to sort of goals that you lay out that are backed by.
No real impact to your executive comp how might we expect these types of commitments to be factored into compensation of executives.
Okay.
Well Stephen I don't think we've talk them through what we've already done for example, this year.
We've integrated a compliance go into our incentive compensation program for all employees right. So we wanted to acknowledge positive behaviors in terms of raising issues.
And acknowledged that look folks are speaking up we also want to get at other parts of our company in which we might be challenged from.
And the ethics or integrity views, so that work is already underway.
As we've stated not only in our opening comments, but.
Prior to that we're going to make ethics integrity and openness every bit as important in this company.
Safety is to this company and that for US puts it right at the very top of our focus each and every day each and every moment.
So while we will talk through additional compensation matters I'm sure in the future like every company does.
To challenge ourselves.
Or goals that debt really truly make a difference in performance and propels you forward.
We're really just very very focused on implementing our new code of conduct that John mentioned and then also the build out of our best in class.
Compliance and ethics program.
Understood. Thanks, so much.
Thank you.
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, Thank you for the time and the opportunity.
So if I can try to rehash a restate some of this a little bit differently. When you think about where youll be by year end I mean could we be in a place to effective Rebase line and provide a clean forward outlook. If you will I mean effectively if we're hearing you right.
Aspirational, you'll have addressed the equity needs in a single shot here with a minority sale or something of the like Ohio should be resolved to the extent to which stakeholders are amenable, including conceivably. The next DSP and ultimately you have an O&M program underway that should conceivably keep you within the 12% to 13%.
The debt.
As you've already talked about in the past can you just kind of a firm.
Thought process and specifically when or if you would think about.
<unk> updated our EPS outlook in turn.
Yeah Julian this is Jon.
John.
Yeah. Julian this is Jon So I think for sure we will have clarity around our equity plan in the fourth quarter.
I think we will do our absolute best to work with the parties down in Columbus to get some resolution there.
I don't know how long that's going to take.
But if we could get something by the end of the year that would be fantastic and we will be in a position at that point in time.
To provide you a long term outlook, including earnings and cash flow.
Yes. This is Steve I would just underscore 1 of John's points here.
I would be very pleased to resolve the Ohio issues by year end for sure.
But I am determined to do it in a way in which it truly is collaborative.
So we are not going to be in a rush to do something thats going to up and the process unnecessarily.
But my true hope is that everybody will come to the table with with progress and openness on their minds.
Yes, I very much appreciate it and if I could clarify the episode of debt commentary and just the overall balance sheet needs right. I mean, you. Obviously previously articulated this equity need through the forecast period, but as you think about sizing this updated need today.
I just wanted to make sure we understand the baseline should be that you are already poised to achieve the 12% to 13% such that.
If you want to triangulate here any incremental needs created from resolution in Ohio or regulatory decisions, otherwise, that's really what you're solving for from here or not.
Rebased line in the balance sheet incrementally right I just want to make sure. We're on the same day.
Yes that makes sense, if you remember our base plan.
Probably had us growing SFO.
$150 million to $200 million a year.
We had our financing plan, which was really going to hold our debt levels.
Somewhat flat, our adjusted debt levels, given where the pension performing in our go forward financing plan that included $1 billion of equity.
So to the extent that we face headwinds in Ohio.
We'll be solving for that.
Yes, absolutely.
The deferred prosecution anything with Ohio, or otherwise and then ultimately you or your base equity as previously described.
Correct.
Excellent Alrighty, just actually a quick clarification that before to me just next steps on delineating that and just what jurisdictions. If you can speak to that at all it may just be high level corporate but I'm just curious.
No it's across the entire business I mean, it's from our utility companies all the way to our corporate centers.
So they are in the process today of.
Executing on all the different initiatives.
Uploading uploading all of that into our financial plan and that'll be part of.
Our go forward plan.
In the fourth quarter, assuming that we get some of these things resolved.
Excellent Alright, I appreciate it best of luck.
Thank you Julien.
Thank you. Our next question comes from the line of Steve Fleishman with Wolfe Research. Please proceed with your question.
Hi, excuse me good morning.
Mark.
John I just have to ask in that equation that you laid out about the.
Issuing the equity in your plan relative to <unk>.
Asset sales.
I think you mentioned potentially selling your debt.
Assets as well.
<unk> use like a 32 multiple.
Is that the kind of range that there might be interest in some of these assets.
Well I think we have.
Real experience in that I think Puget just got 32 times on their transaction.
<unk> got 28 times.
Centerpoint got 38 times.
So I mean, it's in it's in the range of what we've seen.
And the industry.
Got it.
And then.
Whatever you end up selling can you just.
Confirm kind of on taxes, given I think your tax situation is it likely that there be shields against.
Any cash.
Gains on a potential sale.
I would tell you we're working through that we.
We would like to structure it in a tax efficient manner.
But to the extent that we can't and we do have $7 billion of Nols that we could utilize.
So still TBD on that but.
That's something that we're working through.
Okay. So.
I guess I meant totally whether it's the transaction itself or the Nols between the 2.
Should there be.
Limited taxes on potential sales wherever they are.
Yes, Thats correct okay.
That's correct.
Okay and.
I guess.
1 more question just on the on the asset sale aspects. So in the in the DPA Theres a provision on the DPA.
I guess tracking with any assets that are.
Are sold.
Or obviously any change in corporate structure.
Does that impact your asset sale process at all.
Dave No it doesn't but I'm going to ask Ken to maybe comment on that provision in the DPA.
Yes, Steve This is hyun park.
The CLO.
Our standard.
So there is a provision on.
Mergers and change.
Change in core perform in transactions of that nature.
We don't think debt.
Minority interest.
The sale of a subsidiary would trigger a provision like that we would probably.
Speak with the assistant.
Assistant U S attorneys just to make sure that we're on the same page.
The transaction that are contemplated there.
I don't think.
Would be triggered by something like this.
Okay I'll leave my questions there. Thanks, so much.
Thanks, Steve.
Thank you. Our next question comes from the line of Douglas Chopra with Evercore ISI. Please proceed with your question.
Hey, good morning team. Thank you for taking my questions, maybe just on the asset sale process. It looks like you are in advance stages, maybe could you just highlight for us what kind of interest are you seeing what are you are having these discussions with are these strategic buyers IEP or utilities or sort of private entities any color that you could share there.
Thank you.
Yes, there is probably a little too early to get into that level of detail.
<unk>.
I would just tell you that the transactions that we've.
Seen in our space have had solid valuations, which tells me there is a lot of interest in regulated assets and so.
My expectation is there is it going to be a lot of interest in anything we do.
Yeah.
Understood. Thank you and then just to clarify your Ohio discussions right. There are a few week Tuesday.
The investigation.
And amongst other things.
In these sort of the collaborator discussions.
I think all of those issues.
Is that sort of a fair assessment.
On how should we how we should think about sort of thing is getting resolved here going forward.
I would like to think about all of those issues being under 1 umbrella.
Our first meeting that we had in March.
We were.
Very careful to go in and listen to concerns listen and get input on different things that could be done in Ohio for the benefit of customers.
Yes, I would like to put all of this under 1 umbrella once we re engage the collaborative.
Now that the DPA is behind us.
I think we really do have a very good opportunity to not only listen but then start to proceed to some level of action that it would be my greatest hope.
I appreciate that Steven and then maybe just from for US and for investors are there sort of some milestones our time line from this point on as these discussions evolve to watch for.
I want the process to unfold with the next meeting and I want to respect that process. So my hope would be to make significant progress by the end of the year, but I do want to respect the process and not just simply mandates something.
Understood totally understand thank you Steve for taking my questions and John sure.
Thank you.
Thank you. Our next question comes from the line of Sophie Karp with Keybanc capital markets. Please proceed with your question.
Hi, Good morning, Thank you for taking my question.
I'm curious I'm curious to hear your perspective on maybe a little bit more longer term view.
You.
Once you put the initial equity need behind you with potentially in the sale of its taken in the business.
Like you described is roughly 13% flow to debt.
Our long term target or would you be.
Clients may be increase debt into equity and your balance sheet more.
I'll leave it at that.
Sophie I think we've talked about 12% to 13%.
No later than 2024.
I think we would want to improve from there.
Over time, knowing that in our current.
Our business plan.
65% of our Capex is formula rate spend.
Which provides incremental SFO.
Each and every year so.
I would like to get to a spot, where we're 12%, 13% and improving over the long term.
Got it. Thank you and then a follow up if I may.
From that once you have more definitive.
You on the potential transaction here you would be in a position to provide a long term outlook.
And so just just to make sure.
We're talking about the fourth quarter of 2021.
Are you, saying that you would be able to incorporate some views about plenty Anthony core rate case in Ohio, when you do that and assumptions.
That proceeding so from your long term outlook.
That time.
So I think the the rate case in 2024.
We will probably be something that is dealt with as part of the collaborative discussion.
With with all the parties down in Columbus.
So to the extent that we can have clarity around that then we'll obviously provide that.
In the fourth quarter debt, where the timeframe.
So I would tell you that we are open.
2 to those types of recommendations.
If they if the parties thought that we needed to come in to file a case sooner than that I think we would be open to that.
And so it's something that we'll be discussing I'm assuming over the course of the next few months.
Got it.
Yes.
Thank you. Our next question comes from the line of Paul Patterson with Glen Rock Associates. Please.
Please proceed with your question.
Good morning, how are you.
Good morning, Paul.
So I guess as sort of a big picture question.
I need to tell you guys that obviously politics and money go together.
Political business.
And I understand that before as you guys are doing and everything but I guess, what are the thoughts or concerns that might come up.
And how do you sort of Steve how do you.
How do you thread the needle here because on the 1 hand, obviously make sure. It makes sense from you guys to 2.2 obviously institute reforms and everything on the other hand.
It's important right.
For almost all utilities to be heavily involved.
And the in the political process in the jurisdictions you guys operate in.
Hey, Paul.
How do we.
There's always the potential of sort of an overreaction, if you follow what I'm, saying and I'm looking at the actions and they seem very aggressive and understandably so to a certain degree, but how do you sort of thread. The needle do you follow what I'm, saying or are you guys at all concerned about that or how should we as investors think about that.
As the years play out here about how much you guys might not be engaged.
As much as perhaps.
Might be desirable before what I'm, saying.
Yes, I appreciate your question.
Think right now the <unk>.
First thing that we can do is what we have done.
That is to hit the pause button.
We review and then appropriately revise our approach to everything from lobbying in the use of consultants and just take this 1 step at a time and thread the needle appropriately.
Stated before that future vision.
Is going to be.
Much more limited than what it has been in our past because we are moving in a very clearly different direction.
With.
Integrity and trust at the center of it.
The other thing that I think you can count on is robust disclosures that we've committed to as part of the DPA and in other arenas.
But look I do understand.
The need to be in the arena and we will be in it but we're going to be in it and those issues that matter.
To our customers and to our company.
And we're going to do that in a much more limited basis. So I appreciate everybody's patience around the pause button that we hit here, but we're going to continue to just flat out do the right thing.
And constructing the right policy internally before we step back into the arena is the right thing to do.
Okay, and then just in terms of and I wasn't clear on this I think it was Charles question.
With respect to the.
The potential for a rate case proceeding in Ohio.
So just to clarify.
Are you guys, basically, saying that sort of up in the air until you guys get more clarity. It's just too early to say, what what might actually be sort of the fallout so to speak on the Foucault disclosures and with EPA and everything else how how that might proceed or is there any more clarity I guess you have on that or I, just want make sure Anthony.
Yes, Paul So it's it's too early to say, but my point was we would be open to it if that's what the parties suggested.
As part of our collaborative discussions with the other parties.
If there was a sense that we needed to file a case before may of 'twenty 4 we would be open to that.
Okay. Thanks, so much for your other questions have been asked thanks, so much have a great 1.
Thank you.
Thank you ladies and gentlemen, our final question today comes from the line of Andrew Weisel with Scotia Bank. Please proceed with your question.
Thank you good morning, guys and congrats on the DPA is certainly a big milestone.
<unk> covered on the call and we're up on the hour. So I'll keep it short, but 2 things I just wanted to clarify first on the last call you indicated that the internal investigation haven't identified any new issues and it sounded like minimal cause for concern outside of Ohio with the dissolution of the Independent Review Committee does that mean that basically is the review done at this point.
It's safe to say that Theres no other causes for concern beyond what's been revealed so far.
Well.
I think and John Summer Haulers comments.
He had stated that.
Look we have moved to dissolve that committee.
And really we will maintain.
Kind of a reactive or responsive type capability.
And coordinate that with the SLC for any inbound additional issue, but by the dissolution of the committee itself I think it really does represent that it's that it's at its conclusion.
Okay, Great and then as far as O&M costs, I know etsy forward, they're very impressive numbers, you've put out on the cash flow and Capex efficiencies remind me. The O&M that also fall under Etsy forward and maybe more broadly can you give your latest thinking on the outlook for operating expenses, particularly.
With so much learned about operations during the pandemic and finding some of the more permanent improvements in processes.
So Andrew I think as part of the <unk> process.
The goal would be to absorb any inflationary increases for the foreseeable future. So right now we spent about $1 billion $2.50 on what I'll call our base O&M program between corporate.
And our utility group and we would expect to hold that flat over the foreseeable future through different efficiencies in transformational efforts that we identify through forward.
Okay, great. Thank you so much.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Thomas for any final comments.
Thank you very much and thanks for everyone being here with us today.
As we described today, we continue to make solid progress to transform firstenergy to deliver the long term value that our shareholders our employees and all stakeholders seek.
So we will talk to you again, very soon and please be well and be safe.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.