Q2 2023 FirstEnergy Corp Earnings Call
Greetings and welcome to the first Energy Corp, second quarter 2023 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.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Irene <unk>.
This president Investor Relations and communications for first Energy Corp.
Thank you Ms. Brazil, you may begin.
Thank you good morning, everyone and welcome to first energy second quarter 2023 earnings review.
Leading our call today is Brian Tierney, our President and Chief Executive Officer, and John Taylor, Our senior Vice President and Chief Financial Officer.
Our earnings release presentation slides and related financial information are available on our website at Firstenergy Corp Dotcom.
Today's discussion will include the use of non-GAAP financial measures and forward looking statements back.
Factors that could cause our results to differ materially from these statements can be found in our SEC filings. The appendix of today's presentation includes supplemental information along with the reconciliation of non-GAAP financial measures now, it's my pleasure to turn the call over to Brian .
Thank you Irene and good morning, everyone. This is my first earnings call as President and CEO of Firstenergy following John Zillmer, Halder, who did an outstanding job leading this company during a period of transition.
I am thrilled to be here with you today and look forward to talking about our second quarter and year to date results of dividend update some discussion of why I came to Firstenergy learnings from key stakeholder engagement and the outlook for Firstenergy as future.
Let's start with a quick look at the results, we announced yesterday we.
We delivered second quarter GAAP earnings of 41 per share versus <unk> 33 per share last year.
The company reported second quarter operating earnings of 47 per share at the upper end of our guidance range versus 53 per share last year.
Mild temperatures continue to affect our service territory impacting earnings by <unk> <unk> in the quarter.
Cooling degree days were 40% below normal and 48% below last year.
Pension signal peak and financing costs were negative in comparison to last year.
Our results were favorably impacted by a strong focus on operating expenses and continued execution on our regulated capital investment program for the benefit of our customers.
For the year to date period, we reported GAAP earnings of 92 per share versus <unk> 83 per share last year.
Operating earnings for the period were $1 <unk> per share compared to $1 12 for the first half of 2020 to the.
The impact of mild weather in the first half of the year reduced earnings by <unk> 18 per share compared to 2022 with heating degree days being 16% below last year and cooling degree days being 47% lower.
The positive impacts of investments made for the benefit of our customers and operations and maintenance cost discipline, partially offset the negative impact of pension and financing costs.
Despite the impact of the mild weather, we're working hard to be disciplined about our cost structure and to have our investments reflected in rate base.
As such we are confident reaffirming our 2023 operating earnings guidance of $2 44 per share to $2 64 per share.
Last week, our board declared a dividend of 39 per share which is payable September one.
Subject to board approval, we expect to have one additional dividend payable this year.
At that time, it's our expectation that we will be in a position to resume dividend growth in line with the new targeted payout ratio of $60 to 70%, which the board approved earlier. This year. This ratio is more in line with our peers and reflects our improved credit profile as well as our commitment to enhancing value for investors.
Many of you know that I recently returned to the electric industry.
I decided to come to Firstenergy, because I thought the company had evolved from a business and cultural perspective to a point, where my background and experience could help further that evolution and growth I could not be more excited to be working with my colleagues to provide the service that is the lifeblood of modern living to our communities.
The employees of Firstenergy don't just view their services a job it has a vocation that they take very seriously.
This location and the service we deliver are more important than ever electricity demand is growing through the electrification of sectors like transportation and home heating on the supply side request for interconnection of district distributed energy resources and renewables is putting more stress on the electricity grid.
As a wires only company in four states and a fully integrated company in one state I can think of no. Other electric utility that is better positioned to enable the increased demand and facilitate the energy transition then firstenergy.
Through several strategic transactions, including great execution of a $1 5 billion dollar convertible senior note transaction in the second quarter, the board and the management team have strengthened the balance sheet to invest in our regulated businesses and our service territories.
This will lead to better customer reliability system, resiliency and higher growth for the company.
In the time before I arrived the new board and management have done a commendable job of taking responsibility for and putting the activities of the past few years in the rearview mirror.
On July 20th the company filed the second of three planned updates to the department of Justice on the company's deferred prosecution agreement.
It was a very positive report detailing the progress the company has made on people processes and training to preclude such activities from happening again.
We continue to cooperate with the department on any and all requests they make to us.
During the quarter the company received a subpoena from the Ohio organized crime investigations commission related to matters already detailed in the deferred prosecution agreement.
We have cooperated with the commission and we'll continue to do so.
Over the past 60 days I've had the opportunity to meet with key company stakeholders.
I have listened and learned a lot about where the company is in its evolution and some of the key elements required for future success.
I've had many town hall in person and virtual meetings with employees and Union leadership.
We've estimated that I've been able to reach about half of our 12000 employees so far.
This is a very engaged and dedicated workforce.
Employees are asking for resources to better serve our customers.
Have committed to them that we will invest in our system and them by making sure that we have the right complement of employees with the right training and the right equipment to serve our customers.
These employees were not distracted by the events of the past few years and remained focus on safety and our customers. They will lead us into the future with their hard work skill and determination.
Their commitment was on display again this weekend as our employees worked to restore power to customers impacted by the recent storms.
I've had the opportunity to meet with three of our five commissions and two of our state governors and talking with them I committed that the company will take responsibility for the actions of the past when those dockets come before them.
I also expressed our desire to engage constructively in normal course of business with the commissions for the benefit of our customers.
Each of the commissions I spoke with one firstenergy to keep up with the normal day to day business of investing in our utilities and serving our customers.
I have not detected any regulatory overhang associated with the past that would impact our forward facing activities before the commissions.
This is really important because we have a full regulatory schedule that John will take you through in detail.
Camilo sirna and as regulatory team are engaged and base rate cases in Maryland, New Jersey, and West Virginia that represent about $7 billion in rate base with returns that need to be updated.
We have important ESP five and grid by two filings in Ohio, and the consolidation case in Pennsylvania.
We anticipate base rate filings in Ohio, and Pennsylvania next year with current combined rate basis of about $10 $5 billion with returns that also needs to be updated.
Yeah.
We spent a lot of time together as a management team and with the board discussing how to best organize the company to reach our goal as quickly and sustainably.
There are key roles that need to be filled.
In July we added two key hires Abigail Phillips as Chief risk Officer, and Amanda Mertens Campbell, our vice President of external affairs.
These are experienced professionals, who have hit the ground running and are already making an impact.
We are currently looking to fill our chief operating officer role.
We've attractive well known industry, leading candidates and hope to be able to make announcements in the near future.
Over the past two years Firstenergy is consolidated key functions like engineering, HR workforce development and others.
These actions led to efficiencies and consistency and standards.
At the same time, there is a sense that certain decision, making would be better if it were closer to the customer and to the employees providing the service.
We are looking at ways to make that happen and we will be updating you on this in the months to come.
I've spent considerable amount of time with investors talking about our plans for organic investment and growth.
These discussions have focused on the investment needed in our electric grid.
Management additions, we plan to make in the regulatory schedule necessary to convert investment into growth.
I've had the opportunity to meet with three of the major rating agencies I've committed to further optimizing our financing plan and improving our credit metrics and balance sheet.
This included paying down short term borrowings and repurchasing high coupon debt in the open market with the proceeds of the convertible bond offering from earlier in the quarter.
We anticipate <unk> to debt being in the 14% to 15% range by 2025.
Following meetings with these and other stakeholders I have not found any surprises relative to what I knew coming into the company.
What I have found or some key indicators for success.
Our skilled engaged and dedicated workforce.
A constructive regulatory environment focused on customer affordability and reliability.
Our system in need of investment for reliability resiliency and to support the energy transition.
And finally, our strengthened balance sheet to be able to make that investment and to support organic growth.
I believe in this company strategy of making necessary investments to improve reliability resiliency and the customer experience.
In addition to reaffirming the Companys guidance for 2023, I am reaffirming our 6% to 8% long term growth rate off of the original midpoint of prior year's guidance.
We have a strong platform to build upon.
We are getting and we will continue to get the right people in place to lead this company to sustainable growth.
I am incredibly excited about this company and I'm thrilled to be here at the start of what I know will be a very bright future.
With that I will turn it over to John for more financial detail.
Thank you, Brian and good morning, everyone.
Despite the extremely mild temperatures across our service territory in the second quarter, our focus on efficient operations and our financial discipline allowed us to deliver operating results above the midpoint of our guidance.
I'll start today with a review of our financial performance and outlook, then provide an update on our recent regulatory activity.
As Brian mentioned second quarter GAAP earnings were <unk> 41, a share and operating earnings were <unk> 47, a share.
This compares to 2022 second quarter GAAP earnings of 33, a share and operating earnings of 53 a share.
Second quarter results and our distribution business benefited from our ongoing capital investment programs and our laser focus on operating expenses.
Together these helped to offset the impact of lower distribution sales, which largely resulted from mild temperatures as well as a lower pension credit.
Mild temperatures with cooling degree days, 48% below the second quarter of 2022 impacted residential demand by more than 8% and total customer demand by 4% with a year over year impact of <unk> a share.
Total residential sales decreased 11% from the second quarter of 2022 or 2% on a weather adjusted basis on.
On a trailing 12 month basis weather adjusted residential sales continue to trend about 4% higher than 2019 pre pandemic levels and for the June year to date period, they are 2% higher than last year.
In the commercial sector lower weather related demand drove a 6% decrease compared to the second quarter of 2022, while demand was down 3% on a weather adjusted basis.
Usage by commercial customers over the trailing 12 months period continues to trend below 2019 levels by nearly 5% on a weather adjusted basis.
Finally sales to industrial customers increased by just over 1% compared to the second quarter of 2022 and continue recovering towards pre pandemic levels.
As a reminder, revenue from our C&I customer classes are not as sensitive to sales volumes as a result of rate design for these classes, which is typically based off peak usage.
In our transmission business our results benefited from our energizing the future investment program and associated rate base growth of more than 8% compared to the second quarter of 2022.
Favorable weather and accelerated material deliveries allowed us to deploy nearly $400 million of capital into our end transmission investment program during the quarter, bringing our year to date investments to nearly $750 million, which is over 20% ahead of our internal plan and $260 million or more than 50 person.
<unk> ahead of last year.
Looking at our corporate segment second quarter results benefited primarily from lower operating expenses and lower interest costs.
Helped to offset a lower earnings contribution from signal peak.
We are very pleased with how we've responded to the challenges we faced this year, especially the impact of the extremely mild temperatures on distribution sales, which on a year to date basis is <unk> 18 per share below last year, and <unk> 16 per share off plan.
The team's effort allows us to confirm our guidance range. This year of $2 44 to $2 64 a share.
First our focus on our cost structure in particular, our operating expenses has been second to none.
As you can see our O&M has improved 13 cents a share year over year and is well ahead of our internal plan.
Our focus on managing our labor costs through productivity improvements and selective hiring is paying off. In addition in May we announced <unk> and voluntary separation program and a voluntary early retirement program impacting approximately 550 employees.
And we continue to focus on third party and other operating cost, including corporate facility costs branding and sponsorships and improved customer collection rates, which has helped us lower our bad debt expense.
Currently through June our base O&M is running about 6% below plan and 11% below last year and the expectation in the second half is for that trend to improve versus last year. Given some of the steps we have taken to further reduce costs and the maintenance work, we accelerated from 23 into 'twenty two.
Second in early May we completed a very successful sale of $1 5 billion in convertible senior notes with a coupon rate of 4% the.
The initial conversion price represents a premium of approximately 20% from our closing share price on may one.
We consider this a cost effective bridge to when we receive the full $3 $5 billion from our previously announced agreement to sell a 30% interest in Firstenergy transmission LLC.
The use of proceeds will be EPS accretive as we repaid high cost short term borrowings reduced seven and three eights coupon debt at Etsy Corp, and.
<unk> made a $750 million contribution to our pension plan, which had required contributions beginning in 2025.
As a result, our net qualified pension obligation improved to approximately $800 million at the end of the second quarter down from $1 $7 billion at the end of last year, representing a funded status of 91% at the end of June and.
In addition, we don't have any minimum funding requirements through 2027.
The convertible note issuance supports our ongoing work to optimize our financing plan improve our credit metrics and our balance sheet as we target <unk> to debt metrics of 14% to 15%.
Finally, we do anticipate a lower effective tax rate for the year closer to 17%, resulting from the expected use of state net operating loss carryforwards.
Again, despite the extremely mild temperatures we've seen this year. The team has worked extremely hard to rise to the challenges. So we can deliver on our commitments.
Now, let's shift gears and talk about our rate proceedings and other regulatory activity in the quarter.
I'll start with the three base rate cases, we filed earlier this year these cases, which represent over $7 billion of rate base.
And weighted average test year return on equity of less than 6% are progressing well through the regulatory process and consistent with our expectations.
In New Jersey, we received a procedural schedule for our proposed revenue increase of $193 million with evidentiary hearings to be held in early January of next year.
In Maryland, very constructive evidentiary hearings were held last month on our proposed $50 million rate case, which was filed in March and supports equity returns of 10, 6%.
We do expect new rates to go into effect in October of this year.
And in West, Virginia, our Mon power and Potomac Edison West, Virginia Utilities filed a base rate case in may requesting a $207 million increase in revenue.
To support reliability investments grid resiliency, our generation assets and an enhanced customer experience.
While providing assistance to low income customers.
Key proposals in the filing include distribution rate base of $3 $2 billion and return on equity of 10 eight 5%.
A hearing has been set for January of next year and new rates are expected to be effective by the end of March.
Importantly, even with the proposed rate adjustments in each of these jurisdictions our customers would continue to have some of the lowest residential rates among their instate peers.
Other regulatory activity also continues to progress we filed our Ohio Electric security plan five in early April .
As we discussed on our first quarter call. Our proposal supports our generation procurement process for non shopping customers.
<unk> support for investments in the distribution system.
Dorm and vegetation management riders and energy efficiency programs.
Our filing also includes proposals that support low income customers on electric vehicle incentives.
We have requested approval for the new ESP effective June one of next year.
When the ESP for Ns and hearings are scheduled for November of this year.
We also received the procedural schedule last month for the Ohio grid Mod to filing we made last summer.
Under the schedule hearings are planned for October of this year, and we look forward to advancing the $626 million capital investment plan.
To continue our work enhancing the delivery of safe reliable power offering modern customer experiences and supporting emerging technologies.
And Pennsylvania hearings have been set for next week to consider our application to consolidate our four Pennsylvania distribution utilities.
As we stated this is an important step to align with our state operating model simplify our legal entity structure and increase the flexibility and efficiency of our financing strategy and we are in settlement discussions with the parties to the case.
And in May Firstenergy, and Brookfield submitted applications to FERC.
And to the Pennsylvania PUC to facilitate the SEC <unk>.
Alrighty interest sale that was announced in February .
We have received approval for the sale from the Virginia State Corporate Commission and the transaction also requires successful review by <unk>.
Finally, manpower is no longer reviewing the possible purchase of the Pleasants power station.
Last week CRC approved the sale of the plant to a subsidiary of omni as fuel technologies, we will file an update with the West Virginia Public Service Commission when that sale is complete.
So all in all several regulatory proceedings in flight, but everything is progressing very well and consistent with our plan.
The regulatory team and the employees that support the regulatory filings are doing a terrific job and we couldnt be happier with the progress.
As a reminder, you can find summaries of our key filings together with news releases and links to the dockets on the regulatory corner section of the IR website.
I am very proud of our team's performance. Despite the challenges we face this year.
We are on track with key regulatory initiatives and we're executing very well in the areas that we control with strong capital deployment and financial discipline with our operating expenses.
Thank you for your time today now, let's open the call to your questions.
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One moment, please while we poll for questions.
Thank you.
First question comes from the line of Jeremy Tonet with J P. Morgan. Please proceed with your question.
Hi, good morning.
Morning, Jeremy.
Yes.
Just wanted to start off I guess.
Looking to the 10-Q, a little bit here notice.
Cit's subpoena and I was wondering if you might be able to provide a bit more detail on what that entails.
Could that impacted DPA in any way.
So we don't think it will impact the DPA in any way.
Everything in the DPA was laid out the.
The company accepted responsibility for the activities that happened in the DPA.
The OS CIC seems to be asking questions around what was <unk>.
Detailed in the DPA and that the company has taken responsibility for so other than that we really can't offer any color other than to say that we're cooperating with their subpoenas and and we'll continue to do so.
Got it thats helpful. Thanks.
Just with regards to signal peak I was just wondering if you could provide any updated thoughts as far as <unk>.
Asset earnings profile and I guess.
How core that asset is there any other details you can share there.
Hey, Jeremy this is John so.
Obviously.
Signal peak is not an asset that necessarily fits in with our.
Regulated strategy. So it is something that we look at from time to time to determine if there is a market.
Where we could monetize that asset it has been tough.
We continue to look at that.
From time to time commodity prices have come down.
Since the beginning of the year.
But we've factored that into our plan going forward.
Got it and any updated thoughts on what percentage of earnings that might look like in the future given what you described there.
Yes, I think.
It will continue to be less than 10% of the earnings of the company going forward.
So it is going to come down.
On a relative basis as well as the absolute basis.
And we factor that into into the plan going forward.
Got it that's very helpful. One last one if I could.
Brian It seems like you've undertaken a number of new strategic initiatives.
Some it seems like some geographic decentralization efforts and overall and just wondering how significant do you think the synergies could be over time with some of the strategic measures that you've been.
You have undertaken at this point.
So I think a couple of things Jeremy one is I think the consolidation that the company did around certain functions HR engineering workforce.
Development and the like that's where we get real synergies from I think we're going to get.
Better decision, making pushing the decision, making closer to the customers and employees because an executive running that particular entity. We will have the best insight into what the commission's want what the customers want and what the employees need to do their jobs. So I think that decision making can happen.
Much closer to where the activity is happening rather than a lot of that decision, making happening here in Akron.
Seen that model work before at various other companies and I think we'll benefit from that going forward.
Got it that makes sense very helpful. I'll leave it there. Thanks.
Jeremy.
Thank you and our next question is from Mr. Steve Fleishman with Wolfe Research. Please proceed with your question.
Thanks I appreciate it.
Don't get called Mr that much anymore. So.
Yeah.
Good morning, Congrats Brian on your first call.
Question.
Thanks.
Right.
Yes.
I guess just.
In your intro, you mentioned, reaching out and seeing a lot of.
Various constituents, including car regulators and the like and I am just given the history in Ohio, I guess most curious.
Your perception of any discussions there regulator's political.
Employee base et cetera.
Any color specifically in Ohio.
So I have reached out to the.
Commission, there and employees have not had a chance to speak with the executives in the state yet but are still trying to get those scheduled but I'll say that.
The commission there is and always has been.
Very.
Very professional.
Engaged experienced and dedicated to making sure that utilities make the investments that improve reliability and the customer experience in the state and that Steve really hasnt stopped over the last three years right. We're concluding grid Mod one we're concluding the ESP.
For right now so Ohio over time has been very effective in making sure that they're those riders and trackers in place to make the specific investments that the commission wants us to make them when I met with the commissioners there they seem very focused on making sure that we continue to engage.
<unk> and those activities those processes and those investments going forward.
I have with everyone I met with there will be a time and a place to deal with the activities of the past and people have documents ready to do that and I've committed that like we have in other venues that the company will take responsibility for that and do the right thing.
But there is a real desire to make sure that we focus on the go forward business and there seems to be no.
Regulatory hangover associated with the past either in Ohio.
In West, Virginia, and New Jersey that I've also visited with.
Okay.
That's helpful.
And then just you talked about.
Updating the Roes in these cases is that.
If you look at your data based on the.
The way you kind of have it out there it looks like you're under earning pretty much in.
All of these jurisdictions. So are you talking about kind of getting that.
Basically.
Kind of dealing with the under earning situation.
Yes, so thanks, Steve for exposing my coded language there, yes, that's what we're looking to do is.
Is go to places, where we are under earning.
Either due to the fact that we haven't been in for a long time, where that we've made significant investment that hasnt been updated and make sure that we get investment reflected in rate base and that we asked for authorized Roes that are more consistent with what youre seeing across the industry rather than the lower.
ROE that we're currently earning.
Okay, and then lastly, I think you mentioned meeting with the rating agencies or maybe you or John could you just update on that.
Any potential credit upgrades.
Yes, so we've been to see all three of the rating agencies.
Recently.
We've been on a.
On a watch for a change for Moody's for over 18 months now.
Have paid special attention, they're trying to give them what they could mean, we hope that they will take action here in the near future.
Positive way.
As we look at S&P I think Theyre looking for final resolution of the DPA, which will happen hopefully in 2024 as well as.
<unk> debts that are consistently moving above the 12% range and we hope to be doing both of those here in the near future.
Okay. Thank you.
Thank you Steve.
Thank you.
And our next question is from Mr. Sharp <unk> with Guggenheim Partners. Please proceed with your question.
Hey, guys good morning good.
Good morning Shar.
Good morning, John I wanted to just really just get a little bit deeper on signal.
It's okay with you started to see the horse here, but the.
Prices.
It declined another 30% our Q1 update as we're thinking about.
As you may have in place.
I guess, how does all this tie in with the linearity of your 6% to 8% growth rate. So in other words as we're thinking about 'twenty three 'twenty four is there enough levers like O&M and liability management said mitigate incremental signal be pressures as we're thinking about your annual guidance.
That growth rate.
Yes, Thanks, Sean.
Youre right the prices have declined somewhat over the course of the last year.
I would tell you that in 'twenty four 'twenty five.
We kind of had that baked into our plan to begin with.
And so on an absolute and relative basis, we had those earnings declining.
Somewhat to what we've seen historically at least in the last couple of years.
And then if you look at just.
We're we're filing cases currently with over $7 billion of rate base under review.
Probably earning a return.
Percent.
We're really going to see strong regulated growth in the distribution businesses.
We will have some O&M increases in 24 relative to 'twenty, three primarily because of some timing.
But we're also doing a pretty nice job.
Managing that so at least based on what I see today, we have clear line of sight into fairly linear growth going forward.
Okay perfect.
Thank you for that and then obviously, we're approaching the Ohio case next May which is I think a very key and Brian we're all going to monitor for obvious reasons.
Just remind us on the drivers of the cases of capitals that rate base deferred costs. How we should think about maybe that ROE request in relationship to what your earned ROE are especially prism.
The commission diverts from historical precedents lunch goodwill so how do we put all that together.
Into that case, and then also how your messaging more message around rate impacts.
Do you still think it will be built in neutral.
Yeah.
So I would say a couple of things rate base since the last case has increased over 50%.
Our cost of service has increased primarily because of some of the accounting changes associated with.
Our vegetation management program, the AMG costs that were previously capitalized.
So we're projecting a return.
And earned return when we file those cases somewhere in the seven to seven 5%.
Next year versus.
An allowed return in terms of what we're seeing in the state nine 510%.
The capital structure, we think we'll probably be closer to 50 50 right now if you look at the actual capital structure is probably closer to 55%.
Equity, but we think it'll be more in line with what we have today, which is 49% equity so.
Those are the key attributes of the case.
We will continue to refine those and give you a more fulsome update when we file in may of next year.
Okay perfect. Thanks, John for that Super helpful and Brian Congrats on your first earnings call you guys.
Thank you so I appreciate it.
Thank you and our next question is from Mr. Julien Dumoulin Smith with Bank of America. Please proceed with your question.
Hey, good morning, Thanks for the time appreciate it.
And congrats Brian again.
Julian Good morning, yes.
Yes, Sir.
Hey, good morning.
Just following up on a couple of items, maybe John just start with what you were talking.
Talking about a second ago increase in O&M that you were talking about going into next year can you talk about how much of an offset you could be getting from the dep.
Separations in head count here I know you put you put some comments in the queue here on that front.
And then related.
We're adding some headcount here at the C suite and elsewhere.
He takes on that O&M increase you talked about timing issue.
Delving into that a bit more yes, great question, Julian Let me give you a little bit of context as to what we're seeing so when you think about the original plan that we had going into 'twenty. Three we had planned for about a 12% year over year O&M reduction relative to 'twenty, two which was right at about $1 five.
Base O&M.
I would tell you about half of that was what I would consider timing or one time, primarily associated with the work that we accelerated from 23 into 'twenty two to help mitigate the pension, but the other half was sustainable O&M reductions around productivity improvements around lower brand.
And advertising costs, some efficiencies that we were getting to transition to more data and analytics to drive.
More efficiency in our operations and so that was the original plan layer on top of that the impact of the voluntary and involuntary program. We will continue to see more sustainable savings going forward and I think what that will what that will result in is about.
The only thing that Youll really see going into 'twenty four.
Is that one time, which is about $100 million.
<unk> or so of incremental O&M that youll see end of the plan going into 2020 for everything else it will be sustainable sustainable and will be used to offset.
Any type of inflation going forward, so really what we're anticipating.
You look at our current forecast this year versus 22, we've gone from about 12% improvement to about a 15% improvement with about half of that flowing back into next year.
Yes.
Got it excellent. Thank you so much detail there and then if I can continue.
The spirit of detail.
How do you think about asking for higher operating equity ratio.
Entering the desire to use the Brookfield proceeds discussed.
Equity growth investment and then also consistent with the idea of higher equity ratios in the current and past rate case proceed.
You'd already here.
Yeah, Yeah, Great question, So I would tell you with the <unk>.
The first <unk> transaction, plus the common equity issuance, we improved the capital structures, and New Jersey, West, Virginia, Maryland by probably anywhere from two to three points. So we were probably 49.
45% and now we're close to 50, if not above 50% in those jurisdictions, where we have rate proceedings.
Ongoing if you think about.
The next step transaction, which will close next year a lot of about half of that.
Those proceeds have been deployed already through the convertible note offering so we put that money to the pension we took out some holding company debt and then we reduce short term borrowings with the other 50% we will look to improve the capital structure is primarily in Pennsylvania, which right now are about 49%.
And we will look to improve that close to 53% as we gear up to file that case next year.
Got it Okay excellent 53 wonderful really appreciate that and best of luck guys again congrats.
Congrats Brian Thanks.
Thanks Julien.
Thank you and.
And our next question comes from the line of MS. Angie <unk> with Seaport Global. Please proceed with your question.
Thank you I appreciate the message has been decades.
So first.
On on Moody's have you spoken to the agency since you received the new subpoena and I'm just wondering if that has a chance of.
Anyway derailing the upgrades that we've been waiting for.
So we have spoken with them as you would expect when we respond to a subpoena and the dialogue seems to be around.
The things that were associated with the DPA that we have already settled with the department of Justice and taken responsibility for so other than that no.
Not aware of anything else and certainly don't expect any derailment or anything.
Okay and Theres no news on the FCC.
Investigation or any sort of.
Gentlemen, any quantification of the potential downside here.
No.
The initial.
<unk> came to us in.
In September of 2020, and then each year since they've updated their request for information and that seems to be what's happened here at the end of May and.
No we cant quantify what any fine might be there, but expect that there will be one ultimately.
Okay, and then moving on to the equity layer in Ohio, and I know, we've talked about it before.
The the goodwill.
Substantial.
Substantial goodwill and then how you calculate your equity layer.
I mean is there any concern as you go into this distribution rate case about.
The commission is going to calculate equity light here in Ohio.
So I would just say a couple of things we have the riders to date TCR in the Ami rider, which deals with the grid Mod work all of those are based on the capital structure that we have our base rates or our actual capital structure.
We have precedent in the state of Ohio to the seat proceedings as well as through.
Other cases in the state that they don't remove.
Goodwill and those types of calculations, so we don't.
Necessarily see it as a concern.
But it will be something that we'll work through over the course of the case.
Okay, and then lastly, just looking at the performance of your pension fund.
I'm just wondering so.
I'm, assuming that the opposite is going to be true, meaning that there will be a potential game that well.
Support <unk> 24 earnings.
And so if there is any O&M inflation will be more than offset by that potential gain any efficiencies on the O&M side that you talked about already is that right.
Well I would just tell you through June the asset performance was close to 8%.
Versus an expected return for the full year of 8% the.
The discount rate has come down slightly since year end.
But we don't have in the plan.
Growth from the pension.
In 24, and 25 other than from the contribution that we made which will be for the full year.
In 24 versus a partial year for for 2003 so.
Based on our plan, we're going to continue to drive O&M efficiencies through our <unk> program as well as other continuous improvement initiatives and we're not relying on the pension to drive growth for the company.
Good thank you.
Thank you Angie.
Thank you Andrew.
Our next question comes from the line of MS. Sophie Karp with Keybanc capital markets. Please proceed with your question.
Hi, Good morning, Thank you for taking my question.
Sophie.
I just wanted to follow up on Ohio.
Did you provide a little more color on how if there's any discrepancy.
Discrepancy between different candidates in Ohio.
You have there is seven Anthony the average listening and eastern discrepancies then can you provide a little more color on what the range is.
You were cutting out Sophie, but I think your question was we provided.
ROE of seven 3% on a consolidated basis is there.
Any.
Disparity between that amongst the three utilities in the state.
Yes, yes, yes.
I don't have that information here readily available, but I would imagine there would be some disparity between the three.
Companies I don't think it would be significant.
Significantly different from the seven 3%, but we would typically file and the state all three companies at the same time.
And so that's why we provided at the state level.
Yes, but when you file.
Will be.
I guess a pathway for you to consolidate these securities in this rate case.
Or are they too far apart in terms of the economics.
Yes, so I guess theres two steps to that right first like we're done in Pennsylvania, It's a legal entity consolidation, we're still going to have four separate rate books in Pennsylvania and will merge those probably over a period of two to three rate cases, and we will do the same thing in Pennsylvania, So I mean excuse me O'hare.
So we'll make the filing to do the consolidation on a legal entity basis, but we'll still have three separate rate books and will merge those over time.
Got it Okay and then just.
Lastly, a little bit of a housekeeping question could you just reiterate what level those as opposed to debt that you had at the end of the quarter and what would that be if you know.
Our format for the Brookfield transaction closing.
Well the pro forma for the Brookfield transaction closing when we deploy all the proceeds would support the 14% to 15%.
That we're targeting.
If you look at on a trailing 12 months basis I'm, assuming it's probably close to 10, 5%.
We were at 10, 5% at the end of last year.
So as we.
Start to receive the proceeds in next year deploy those proceeds you'll see a pretty significant improvement will also have rate relief in New Jersey, West, Virginia, Maryland that will help the metrics going into next year.
Got you.
Right now I would anticipate.
The plan with the pension contribution for the full year of 'twenty two.
Being close to 11%.
<unk> to debt for this year.
Excellent. Thank you so much.
Thank you Sophie.
Thank you.
And our next question comes from the line of Mr. Gregg <unk> with UBS. Please proceed with your question.
Yes. Thank you.
Yes.
Maybe a follow up on the O&M.
And just how youre thinking about that.
Longer term throughout the plan.
What levels.
Can you achieve.
What areas.
Can you look at two to drive out those cuts or efficiencies. Thanks.
Yes, so like I mentioned earlier, I mean, you will see a little bit of <unk>.
An increase next year, just mainly because of the work that we accelerated.
From 23 into 'twenty, two as well as some other timing items.
But I think as Brian and I have talked about the plan going forward.
Tenuous improvement initiatives are going to be very important to the plan.
And so that'll be something that we continue to stay focus on now whether that is.
Is less than inflation or do we want to drive out.
All of the inflation and keep O&M flat I mean, I think that'll depend on the facts and circumstances within the plan.
And where we are but we don't anticipate significant O&M growth.
Once we get past 2020 for Greg we've talked about this internally.
I've seen utilities that are the premier utilities in the industry.
Have continuous improvement is part of their culture.
And we've had a program in <unk>.
Forward, which this year is beginning to pay significant dividends as employees are bracing embracing the tools that we've given them to be able to do that.
We're going to make that not a program, but part of our culture and DNA going forward that we're not going to brand as <unk> forward, we're just going to call. It continuous improvement and our goal will be to flatten or even decrease that O&M curve over time as part of an overall program.
It is continuous improvement not just O&M savings.
Okay. Thank you.
Thanks, Greg.
Thank you and our next question comes from the line of Mr. Paul Patterson with Glen Rock Associates. Please proceed with your question.
Hey, good morning.
Good morning, Paul.
So just.
On the subpoena.
Uh huh.
This seems a little odd to me.
For meeting the 10-Q it seems to me that you guys weren't aware of this investigation and this is.
So it shows up I guess.
So late in the day it seems.
Any thoughts about that or.
So.
Yes.
Other people might agree with your comment on the timing.
By law, the OS CICS investigations need to be kept confidential. So it's not a surprise to us that our first knowledge of it was the subpoena.
But given the fact that it seems to be dealing with activities that have been dealt with resolved.
Responsibility taken four and paid for in the DPA.
We just would have to leave it up to the OS CIC what their interest in these matters are.
Okay.
Are there any discussions where they're explaining it or you can relate to us about what might be going on I guess with respect to them is.
Is that right or.
Yes, just nothing other than us.
<unk> transfer of information that Theyre requesting which is all related to the BPA activities. Okay.
Okay, Great and then with respect to your discussions with regulators.
Around your service territories.
I notice that you guys have.
Hum.
Vault or proposing it seems to me increased funding for low income.
Hum.
Affordability challenged.
Repairs.
If I'm correct and I'm just wondering how is the regulatory.
Our reaction to that do they see that is going on a long way to sort of addressing the issue.
<unk> concerns.
Yes, I'll just I'll, just say, we're trying to engage with our commissions constructively on that issue all of them as you might suppose are very focused given economic issues given inflationary pressures on our customers all of them are focused on affordability for our customers.
We're trying to put our dollars to work to address those concerns as well.
And I think we're just trying to be constructive with our customers and commissions as we work through other rate matters that we have before them.
Absolutely no.
I understand that I guess, I guess, I'm, sorry, maybe I'm not asking it right I guess I'm wondering is when you approach them with that proposals are they.
Receptive or I mean, maybe it's too early to say or what have you, but but.
Sometimes the jurisdictions get more concerned about sort of the.
The actual total sort of impact in other jurisdictions. It seems like if you can sort of address the issue of those most.
Most at risk I guess of.
A couple of adverse.
Issues that that seems to go a long way do you follow what I'm, saying.
Yes, I don't know if im missing or misunderstanding the questions all of our commissions view it as being positive and constructive when we try to help in our rate proceedings, those who are most challenged to pay their bills.
Sorry, Im sorry, maybe I didn't hear correctly I apologize.
And then finally, there is the chevron doctrine.
That's being that's I guess at the Supreme Court.
And.
It's kind of a significant issue it seems like actually just in terms of EPA or what have you.
I don't know what that sort of makes it a bit in terms of what the potential impact might be and I was wondering do you guys have any sense about what what.
A substantial change in this.
This this sort of long long held sort of regulatory approach to things.
Might be if the if the Supreme Court.
Speculating would be.
We've taken would have a new completely different take on it.
So.
We'll dig into that but I'll, just say that has not been on the top of my list in my first 60 days here.
Sure.
I can imagine that I was just wondering if there's any if there's any.
If there's any thoughts that you guys have about it but I can I can understand if.
There's other stuff going on.
Thanks, so much.
Okay. Thanks, Paul.
Thank you.
Our next question comes from the line of Mr. Paul Fremont with Ladenburg. Please proceed with your question.
Great. Thank you very much.
With respect to the CIC is there anything under.
Under the DPA that would prevent the state from taking actions.
Or potential violations of state law, covering the same ground that the federal DPA covered.
Paul We just feel like we've taken responsibility for the activities are outlined in the BPA.
<unk>.
And have paid defined for that and taken responsibility for it so.
I really don't know the answer to your question.
Okay. So it's possible that they could just re litigate the same issues that were essentially resolved in litigated at the federal level.
Yes that would be unusual.
Okay.
That that's my only question. Thank you.
Okay. Thanks, Paul.
Thank you there are no further questions at this time I would like to turn the floor.
Back over to Mr. Tierney for closing comment.
Okay, we just like to thank everyone for their participation in today's call.
We look forward to continuing this dialogue going forward I appreciate your interest in and are pleased with the quarter.
And we.
We look forward to seeing you next time.
This concludes today's teleconference. You may disconnect your lines at this time.
You for your participation.
Mhm.
Hum.
Hello.
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Oh.