Q4 2024 FirstEnergy Corp Earnings Call
Speaker Change: Hello and welcome to First Energy Corp fourth quarter 2024 earnings conference call.
As a reminder, this conference is being recorded. It is now my pleasure to turn the call over
to Karen Saget.
Vice President of Investor Relations, please.
Go ahead, Karen.
Speaker Change: Thank you. Good morning, everyone, and welcome to First Energy's 4th Quarter 2024 Earnings Review. Our Chair, President, and Chief Executive Officer, Brian Tierney, will lead our call today, and he will be joined by John Taylor, our Senior Vice President and Chief Financial Officer.
Speaker Change: Our earnings release, presentation slides, and related financial information are available on our website at FirstEnergyCorp.com. Today's discussion will include the use of non-GAAP financial measures and forward-looking statements, which are subject to risks and uncertainties.
Speaker Change: Please read our cautionary statement and discussion of non-GAAP financial measures on slides 2 and 3 of the presentation.
Speaker Change: Factors discussed in today's earnings news release, during today's conference call, and in our SEC filings could cause our actual results to differ materially from these forward-looking statements.
Speaker Change: 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.
Brian Tierney: Thank you, Karen. Good morning, everyone. Thank you for joining us today and for your interest in First Energy.
Brian Tierney: I would like to welcome Karen Saget to First Energy as our Head of Investor Relations. This is Karen's first of what I hope will be many earnings calls with us. She has quickly become a valued member of the management team.
Brian Tierney: 2024 was a year of extraordinary structural change for our company, and I'm proud of what we've accomplished.
Brian Tierney: We significantly de-risked our business from financial and regulatory perspectives and put together a team of leaders who are focused on driving a high level of performance for customers, employees, and investors.
Brian Tierney: We also activated a powerful business model to invest in our electric infrastructure and our people, operate safely and efficiently with a focus on continuous improvement, recover our prudently incurred investments, and finance our regulated operations.
Brian Tierney: Together, these efforts are making a positive impact for our 6 million customers.
Brian Tierney: energizing and engaging our employees and supporting our sustainable long-term growth objectives.
Speaker Change: I'll start today's call with a look at our 2024 financial performance and key milestones over the past year. I will discuss our outlook for 2025 and beyond and review the value proposition we offer shareholders.
Speaker Change: We delivered 2024 GAAP earnings of $1.70 per share. Operating earnings were $2.63 per share within the forecasted guidance range.
Speaker Change: Our 2024 results benefited from new rates and investments in our regulated businesses, execution on our capital plan, and O&M discipline.
Earnings were also impacted by several headwinds throughout the year.
Speaker Change: These included lower sales volumes, partially due to mild weather conditions versus normal throughout much of the year.
Speaker Change: In the second half of the year, our Ohio revenues were below our plan due to the ESP-5 order, which I will discuss in more detail a bit later.
Employees did a great job of navigating these headwinds.
Speaker Change: A primary focus of our new leadership team is making the company more resilient so we can drive results consistent with our plan and realize our company's potential.
Speaker Change: We're working across the organization to drive performance excellence and build a strong culture of continuous improvement.
Speaker Change: This includes ensuring our processes, performance, and accountability are consistent with being a premier electric company.
Speaker Change: The financial and regulatory milestones we achieved in 2024 and over the last couple of years have strengthened our foundation and reduced the risk profile of our underlying business.
Speaker Change: The success of the Significant Regulatory Program we launched in 2023 has been instrumental to executing our strategy.
Speaker Change: We have now completed rate reviews in four of our five states since the fourth quarter of 2023, de-risking 83% of our rate base when including transmission formula rate investments.
Speaker Change: Approved rate cases over the past 18 months in Maryland, West Virginia, New Jersey, and Pennsylvania have resulted in a net annual revenue increase of approximately 450 million dollars.
Speaker Change: and allow us to make the necessary investments for a stronger and more reliable grid.
Speaker Change: Most recently, in November, the Pennsylvania Commission approved our $225 million base rate case settlement, with new rates effective January 1st, 2025.
Speaker Change: We were pleased to reach this constructive outcome which builds on service reliability enhancements made in recent years.
Speaker Change: We also resolved several additional proceedings in 2024 to facilitate our investment plans and recover specific costs.
Speaker Change: The Pennsylvania Commission approved our third long-term infrastructure investment plan, known as LTIP3, in December.
Speaker Change: This program will track approximately $1.6 billion of capital targeted at grid modernization and reliability in Pennsylvania over the next five years.
Speaker Change: This includes planned investments of approximately $300 million in 2025 to improve circuits, deploy reclosers, and other sectionalizing devices, and replace overhead equipment to reduce customer outage times.
Speaker Change: Also in December, our Grid Mod 2 settlement was approved by the Ohio Commission.
Speaker Change: This is a four-year program that includes capital investments of just over $400 million to bring smart meter technology to all of our Ohio customers.
Speaker Change: In New Jersey, the BPU approved JCP&L's Energy Efficiency and Conservation Plan in November, which will help customers save on their electric bills.
Speaker Change: Total program costs of $817 million from January 2025 through June of 2027 with an authorized return of 9.6% on program investments.
Speaker Change: Turning to our balance sheet, completing the sale last March of the incremental 30% of First Energy Transmission's equity interest was a transformative milestone for our company.
Speaker Change: It marked the final phase of our $7 billion multi-year effort to improve our balance sheet and fuel our investment plan.
Speaker Change: Successfully closing the transaction was the catalyst for our return to investment grade status and all three credit rating agencies.
Speaker Change: Across our holding company and subsidiaries, we achieved a total of 40 ratings upgrades in 2024, more than double the number of upgrades in the entire U.S. electric utility sector in 2023.
Speaker Change: Today, all first energy subsidiaries are investment grade, and substantially all of our companies have their highest ratings in more than 20 years, and we are committed to maintaining these metrics.
Speaker Change: We put the power of our stronger financial position behind our comprehensive capital investment program, Energize 365, to forge a smarter, more reliable grid.
Speaker Change: In 2024, we invested $4.5 billion in our system through this plan, surpassing our original plan by 5%, and an increase of more than 20% compared to 2023.
Speaker Change: To ensure we're performing at the highest levels, we transformed our organization and implemented an operating model that moves decision-making closer to our customers and the employees doing the work.
Speaker Change: We then recruited external candidates and advanced internal talent to lead our companies forward.
Speaker Change: In total, we have placed 24 individuals into critical roles at the vice president level and above. This includes nine members of the senior leadership team, including our business unit presidents, as well as other key leadership roles.
Speaker Change: This new leadership team is applying their deep experience and building a high-performance culture based on accountability, operational excellence, financial discipline, and achieving constructive regulatory outcomes.
Speaker Change: Another milestone in 2024 was resolving certain Ohio legacy proceedings, allowing us to focus our vision on the future.
Speaker Change: Finally, we delivered to shareholders a solid dividend with 2024 declarations totaling $1.70 per share, an increase of just over 6% versus those declared in 2023.
Speaker Change: The successes we achieved in 2024 strengthen our foundation and support our vision for the company's bright future.
Speaker Change: Turning to slide seven, let's begin a quick regulatory overview, starting with Ohio, which represents 17% of our rate base.
Speaker Change: As many of you know, the Commission's long-awaited Auditor's Report and our base rate case was made public last Friday.
Speaker Change: We believe the auditor's report was constructive on several issues and look forward to filing our response in the near term.
Speaker Change: The Ohio Commission has been diligent in separating legacy issues from traditional rape proceedings and has maintained that diligence in this case.
The auditor's report focused mainly on a rate request.
Speaker Change: We have not experienced regulatory overhang in our interactions with the Commission.
Speaker Change: In regards to the electric security plan, the commission approved our withdrawal of ESP-5 in December. The Ohio companies reverted back to ESP-4 on February 1st, but without revenue increases for our distribution capital recovery rider.
Speaker Change: ESP4 should remain in place until ESP6 goes into effect, which is expected to be close in time to when the base rate case is effective.
Speaker Change: Like ESP-5, our ESP-6 proposal focuses on reliability, affordability, and stewardship.
Speaker Change: ESP-6 defines distribution riders for the full term of the ESP and proposes increases to the DCR, tied to reliability performance, to better align with in-state peers and support significant capital investments.
Speaker Change: In New Jersey, we continue working toward a settlement related to our infrastructure investment program, Energize New Jersey, which includes investments targeting system resiliency and substation modernization.
Speaker Change: In West Virginia this year, we will file our required integrated resource plan.
Speaker Change: 10-year plan will include updated load forecasts and provide options around future generation needs to serve our customers and support economic development.
Speaker Change: Given the energy needs in West Virginia, we plan to explore building new dispatchable generation in the state.
Speaker Change: Should this be approved, it would be incremental to our investment plan.
Unknown Executive, Irene Prezelj
Turning to slide 8.
Speaker Change: Over the last few years, we had remarkable growth in our core regulated earnings, but this growth did not come through clearly because of non-core components of operating earnings.
Speaker Change: Today, to assist investors in assessing our performance in our core business,
Speaker Change: We are introducing core earnings, which are the earnings of our distribution, integrated, standalone transmission, and corporate segments, excluding the earnings contribution from pension and the signal peak mine and special items.
Speaker Change: From 2022 to 2024, high-quality core earnings have grown by 33%.
Speaker Change: During the same period, non-core earnings from pension signal peak, which are volatile and often outside of management's control, decreased by 59 percent.
Speaker Change: As we have in the past, we will continue to seek an exit from our Signal Peak ownership position.
Speaker Change: We believe that core earnings better reflect the true performance of the regulated utilities we manage and the necessary corporate functions of the company.
Speaker Change: Beginning in 2025 and for future periods, we will provide guidance for core earnings and core earnings growth rates.
Speaker Change: For 2025, we are introducing a core earnings per share guidance range of $2.40 per share to $2.60.
Speaker Change: This compares the core earnings of $2.37 per share in 2024.
Speaker Change: At the midpoint of 2025 guidance, this would represent growth of 5.5% or 7% when adjusted for the dilutive effect of the 2024 FET transaction.
Speaker Change: Our 2025 guidance includes continued solid growth from investments in our regulated operations.
Speaker Change: Our new guidance also accounts for several unanticipated factors that developed since our third quarter call.
Speaker Change: These include the impact of higher than anticipated financing costs, including significantly higher interest rates.
Speaker Change: The removal of a 50 basis point incentive from ATSI transmission rates.
Speaker Change: Consistent with the decision by the U.S. Sixth Circuit Court of Appeals in January.
Speaker Change: and Ohio DCR Revenue Caps, which were frozen at May 2024 levels, consistent with the Commission's December order and our return to ESP-4 in February.
Speaker Change: In addition, the settlement in the Pennsylvania rate base calls for incremental spend on reliability-related maintenance activities, which is fully recovered in new rates.
Speaker Change: Initially, our plan included reductions in O&M in all of our segments so that total baseline O&M, inclusive of the increase in Pennsylvania, would be flat to 2023 and 2024.
Speaker Change: Ultimately, we concluded that doing so would not be sustainable and would not support the long-term operating, regulatory, and financial objectives of our company.
Speaker Change: Our core earnings guidance for 2025 reflects financial discipline from a targeted program being led by the new management team.
Speaker Change: The program includes organizational design changes, as well as programs focused on procurement and contractor staffing.
Speaker Change: With this program, we expect O&M in 2025 to be flat to 2023 and 2024, with the exception of the Pennsylvania-related increases.
Speaker Change: John will provide more detail on O&M Discipline later in the call.
Speaker Change: This approach was developed with the new leadership of our operating companies.
Speaker Change: In this model, decision-making is closer to the customer, employee, and regulator.
Speaker Change: We will operate and invest consistent with the regulatory outcomes and commitments we have made to our customers in each jurisdiction.
Speaker Change: We anticipate investing five billion dollars in our regulated properties during the year, an increase of approximately 11% over 2024. This investment is enabled by recent rate activity.
Speaker Change: Subject to board approval, we anticipate annual dividend declarations totaling $1.78 per share in 2025 and a payout ratio of 60-70% of core earnings over the planning period.
Speaker Change: For the 2025 through 2029 investment horizon, we are providing forecasted core earnings compounded annual growth rate of 6 to 8 percent.
Speaker Change: We're extending our ENERGIZE 365 $28 billion investment program through 2029.
Speaker Change: This represents an 8% increase from our previous 5-year plan and results in a 9% compounded annual rate-based growth during the period.
Speaker Change: For our base investment plan, we do not anticipate incremental equity needs beyond our ongoing employee benefit programs.
Speaker Change: We are committed to our investment grade credit ratings, and as we have incremental investment opportunities, we will consider a broad range of financing operations.
Speaker Change: Our CapEx plan is solid and has the flexibility to handle changes to individual projects.
Speaker Change: We believe that First Energy represents a low-risk, reasonable return investment proposition to investors with an attractive total return opportunity of 10 to 12 percent.
Speaker Change: With that, let me turn the call over to John for more detail.
Jon?
John Taylor: Thanks, Brian. Good morning, everyone. Thank you for joining the call. Today, I will briefly review our 2024 performance, provide additional detail on regulatory matters, and discuss our outlook for 2025 and beyond.
John Taylor: You can find more detail on our results, including Reconciliations for Core Earnings, in the Strategic and Financial Highlights document we posted to our IR website yesterday afternoon.
John Taylor: As Brian mentioned, going forward, we will report our results using core earnings, which reflects the results of our regulated operations and holding company activity.
John Taylor: excluding the earnings from Signal Peak and the mark-to-market impact of our pension plan.
John Taylor: This was a very thoughtful decision and is the result of the volatility in these two income streams that, quite frankly, we don't control.
John Taylor: For example, in addition to the volatility we've seen since 2022, in 2024, the earnings contribution of Signal Peak and Pension was 26 cents a share.
John Taylor: Our initial expectation for these contributions for 2025 was a little south of 20 cents a share, but that outlook improved as of the end of Q3 as our expectation for interest rates would remain low and commodity prices on Signal Peak Coal were stable.
John Taylor: In Q4, interest rates increased significantly, negatively impacting the pension and commodity prices, have significantly decreased, impacting the profitability of Signal Peak.
John Taylor: The contribution of these two items have declined significantly from our expectation and this type of volatility is not sustainable and the reason for the change to reporting on core earnings.
John Taylor: To close out 2024, I'll walk you through our results relative to the guidance we provided on operating earnings.
John Taylor: Results are at the lower end of our revised earnings guidance range due to the impact of unanticipated lower customer demand in part due to milder temperatures in Q4.
John Taylor: The combined impact of our legacy non-regulated Signal Peak Investment and Net Periodic Pension Income decreased 30% from $0.36 a share in 2023 to $0.26 a share in 2024 and comprised about 10% of our 2024 operating earnings.
John Taylor: Our full year results benefited from new base rates in our integrated business and growth from formula rate transmission and distribution investment programs.
John Taylor: which resulted in a significant improvement across our regulated businesses as compared to 2023.
John Taylor: In our distribution segment, earnings increased 4 cents year-over-year, primarily from higher weather-related distribution sales, lower Ohio rate credits, and higher revenues associated with the Pennsylvania DIS Program.
John Taylor: This was partially offset by the impact of the Ohio ESP-5 order, which negatively impacted results by four cents a share, as well as higher non-deferred storm costs.
John Taylor: In our integrated segment, earnings increased 29 cents a share, primarily due to new base rates in New Jersey, West Virginia, and Maryland, and higher weather-related distribution sales, partially offset by a higher effective income tax rate.
John Taylor: The three base rate cases in this segment resulted in a significant improvement in the returns in these jurisdictions, with ROEs at the end of 2024 ranging from 8.3% to 9.3% on the equity portion of rate base.
John Taylor: In the standalone transmission business, earnings declined 12 cents a share.
John Taylor: Our investment programs increased earnings by 7 cents a share, or more than 10%.
John Taylor: versus 2023. However, this was more than offset by the dilution from the 30% interest sale of FET, which closed in March of 2024.
John Taylor: FEO and rate base in this business was 5.3 billion dollars at the end of 2024 which represents year-over-year growth of 10 percent.
John Taylor: Finally, in our corporate segment, losses increased 4 cents a share year over year, largely due to the absence.
John Taylor: of a state tax benefit recognized in 2023. This was partially offset by lower interest expense, reflecting $460 million in debt redemptions
John Taylor: at F.E. Holdco as part of the planned use of proceeds from the F.E.T. transaction.
John Taylor: Turning to the balance sheet as part of our 2024 financing plan, during the fourth quarter we issued $700 million in debt securities with registration rights at a JCP&L.
John Taylor: The bond issuance was oversubscribed by 8 times with a coupon of 5.1% representing a spread of 95 basis points.
John Taylor: All in, our 2024 financing plan included five transactions totaling $2.1 billion with a weighted average interest rate of 5.1%.
John Taylor: Additionally, we continue to mitigate risk associated with our pension plan.
John Taylor: In January, we completed a $650 million lift-out associated with the company's former generation subsidiaries at 99% of par.
John Taylor: In combination with the lift out in December of 2023, we have removed approximately $1.4 billion of gross pension obligations from the balance sheet representing the obligation and funding risk related to our former generation subsidiaries.
John Taylor: Looking at our credit metrics, FFO to total debt was impacted by the SEC and OOCIC settlement payments, as well as a historic storm event in Cleveland last August.
John Taylor: excluding these unique payments which negatively impacted the metrics by 150 basis points.
FFO to total debt was 14% in 2024.
A strong balance sheet remains paramount to our strategy.
John Taylor: Shifting gears, let's talk about our expectations for 2025 and our five-year planning period through 2029.
The material is posted to our website yesterday afternoon.
John Taylor: included updated financial outlook including our base capital plan and rate based growth which supports our targeted core earnings compounded annual growth rate of six to eight percent through 2029
John Taylor: Our expanded five-year ENERGIZE 365 Capital Investment Program of 28 billion dollars includes increasing annual capital investments from 5 billion dollars in 2025 to 6.4 billion dollars.
John Taylor: in 2029, resulting in compounded annual rate-based growth of 9% through the end of the five-year period.
John Taylor: For 2025, these capital investments will be financed with a combination of internally generated cash flow and debt issued at our operating companies.
John Taylor: This year's debt financing planning currently consists of eight transactions, approximating $3.6 billion, of which $2 billion is new money requirements.
John Taylor: Approximately 75% of the planned investments are in formula rate or formula-like recovery mechanisms that provide real-time returns.
John Taylor: which resulted in a 10% compounded annual rate-based growth in our stand-alone transmission segment and 24% growth in transmission rate base in our integrated business.
John Taylor: Our financial results for 2024 resulted in a consolidated return on equity of 9.4% on rate base of $25.9 billion, which compares to 8.8% in 2023.
John Taylor: Capital Deployment, Continued Focus on Financial Discipline with Operating Expenses, and Regulatory Outcomes that Support Fair Returns on our Investments are pillars to our plan.
John Taylor: Additionally, through the recent base rate cases, we have made significant improvement in aligning our regulatory returns, as disclosed in our materials, with our core earnings.
John Taylor: with adjustments or differences being more traditional and largely limited to AFUDC equity, the recovery of retirement benefits and items such as non-operating income and interest synchronization.
John Taylor: Our well-positioned footprint continues to be very attractive to data center developers. Through 2029, our plan includes 2.6 gigawatts of data center demand that is active or contracted.
John Taylor: And we are seeing data center growth in our pipeline of just over 5.5 gigawatts through that same period, which would result in an incremental $350 million to our base capital program.
John Taylor: Beyond 2029, the pipeline includes over 6 gigawatts of data center activity and even greater potential with the steady influx of load studies we've seen over the past year.
John Taylor: Our current forecast, which only includes contracted data center demand, includes compounded annual sales growth for an industrial class of 5% from 25 to 29 and in the near term 8.5% from 25 to 27.
John Taylor: This forecast would increase as projects in the pipeline become contracted in addition to providing incremental transmission investment opportunities.
John Taylor: Turning to our financial plan for 2025. As Brian mentioned, since our Q3 call, there have been some developments that have lowered our core earnings forecast for 2025 versus our most recent expectation.
John Taylor: Regulatory outcomes that were slightly less than planned, specifically related to Ohio DCR revenues being held flat as part of the ESP-5 withdrawal and the 50 basis point reduction in the ATSE ROE, as well as a decision on base O&M that Brian discussed earlier.
John Taylor: We are providing a 2025 core earnings guidance range of $2.40 to $2.60 a share.
John Taylor: with a $2.50 per share midpoint, representing 5.5% growth off the 2024 core earnings of $2.37.
John Taylor: 2025 is primarily driven by the outcome of the approved Pennsylvania-based rate case in our distribution segment.
John Taylor: which resulted in a net annual revenue increase of $225 million beginning January 1st of this year and includes recovery of expenses for additional operational and maintenance work, such as an enhanced vegetation management program, as well as storm cost and other deferred cost recovery.
John Taylor: Additionally, the integrated segment is positively impacted by the first full year of new rates in West Virginia and New Jersey.
John Taylor: and continued growth in our formula-like and formula rate investment programs.
John Taylor: As Brian discussed, we are driving meaningful changes across First Energy to enable our long-term success as a premier electric company.
John Taylor: This requires investments to modernize the way we work and improve the customer experience.
John Taylor: While we strive for a balance, we are focused on meeting our regulatory commitments and doing this work as effectively and efficiently as we can.
Our plan supports this foundational work to achieve our vision.
John Taylor: For example, consistent with our approved base rate case in Pennsylvania, our O&M expenses in 2025 includes increased scope to drive reliability improvements, mostly through an enhanced vegetation management program.
John Taylor: Absent the higher O&M in Pennsylvania which is fully recovered through revenue increases, our 2025 planned O&M is flat to 2024 and 2023 levels.
John Taylor: We are focused on financial discipline across the business, including supply chain optimization, reducing reliance on contractors and staff augmentation, and driving efficiencies throughout the entire organization.
John Taylor: This is work that is extremely important and will be a continued focus of the management team.
John Taylor: We have made tremendous progress to execute on our business model, de-risk the company, invest in the opportunities.
John Taylor: across our businesses to improve the reliability and resiliency of the electric system and enhance the customer experience.
John Taylor: We also have a new organizational structure and leadership team in place to deliver on our commitments to our stakeholders.
John Taylor: With a concrete focus on our core business, we are excited about the future and look forward to building on our momentum and delivering value as a premier electric company.
Now let's open the call to Q&A.
Unknown Executive, Irene Prezelj
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions.
Speaker Change: Our first question is from Char Perez with Guggenheim Partners. Please proceed.
Hey guys, good morning.
Unknown Executive, Irene Prezelj
Unknown Executive, Irene Prezelj
Can you guys hear me?
Unknown Executive, Irene Prezelj
Yes, we can hear you.
Speaker Change: Great, so Brian just diving into the 25 guide which is obviously a bit of a reset just trying to get a sense on
Speaker Change: How much of the tail risks you're highlighting are timing-related? What you're now assuming on interest rates, so could that become a tailwind? How much of the O&M pressure is PA-related? And just, I guess, where are you within the 6 to 8 off the lower 25 base, assuming what we know today? Thanks.
Unknown Executive, Irene Prezelj
Unknown Executive, Irene Prezelj
I believe we're having slight difficulty with the speaker line.
Unknown Executive, Irene Prezelj
Unknown Executive, Irene Prezelj
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Unknown Executive, Irene Prezelj
Unknown Executive, Irene Prezelj
Speaker Change: Thank you for your patience while we figure out this technical difficulties.
Unknown Executive, Irene Prezelj
Unknown Executive, Irene Prezelj
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Unknown Executive, Irene Prezelj
Once again, thank you for standing by while we.
to our technical difficulties.
Unknown Executive, Irene Prezelj
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Speaker Change: Ladies and gentlemen, we thank you for your patience. Please remain on the line. The event will resume momentarily. Again, thank you for your patience and please remain on the line. The event will resume momentarily.
Unknown Executive, Irene Prezelj
Shark, can you hear us?
Yeah, much better now. Hey, Brian, good morning.
Speaker Change: Well, I'm sorry about that. Maybe we cut O&M a little too far.
Speaker Change: Unknown Speaker I thought you were so enamored by my question you were kind of speechless. So I was complimenting myself there. Unknown Speaker It was, it was a great question. Let me, let me go about answering it and if I missed something, let me know.
Speaker Change: We do anticipate being in that 6% to 8% range, beginning 25% through to 26% and for the full range that we've talked about. As a management team, we will be disappointed if we don't end in the upper end of that range.
Speaker Change: As John and I talked about during the call, much of the O&M change, all of the O&M change can be described as the increase that we received in the Pennsylvania base rate case settlement. As a management team, we felt it was important to spend the dollars that we agreed to spend in Pennsylvania.
Speaker Change: to demonstrate that discipline. We do have a program in place that's talking about
Speaker Change: Reducing staff augmentation, procurement efforts, some organizational design efforts. So we are incredibly focused on O&M discipline.
Speaker Change: But felt that we needed to spend the dollars that we committed to spending in Pennsylvania, so
Speaker Change: Like I said, in the range, beginning 25 to 26, and through the whole investment horizon that we've talked about, 25 through 29, and again, we'll be disappointed if we weren't in the upper end of the range.
Speaker Change: Okay, perfect. And then just quickly touching on the audit report, I mean, a few moving pieces there, but the report kind of suggested a lower revenue requirement, rate base, ROE, the equity ratio was flat.
Speaker Change: No mention of goodwill treatment. Obviously, the numbers aren't as relevant as they reflect ESP-5 But how could the findings play into ESP-6? You have a lot of balls in the air in the state So just want to get a sense if there's any read-throughs In your upcoming filing. Thanks
Speaker Change: The base rate case to the ESP and back and forth and we need to reconcile those and we anticipate doing that shortly in an upcoming filing.
Speaker Change: But I do think it's significant that they did focus on a couple of things that we've talked about previously.
They recommended a capital structure of 51% equity.
Our current
Capital Structure is 55%.
No real mention of goodwill in that discussion.
They've also proposed an ROE of 9.63 versus our proposed
10.8.
Speaker Change: but the 9.63 is consistent with what other companies have gotten in Ohio. We're going to address these issues. We, again, think that...
Speaker Change: Our view is the right one, the actual equity structure, the higher ROE.
Speaker Change: and we'll be addressing those issues in our response to the audit report here in the next 30 days.
Speaker Change: Okay, perfect. I appreciate it, Brian. Thanks so much. I'll pass it to someone else. Thank you. Sure.
Speaker Change: Our next question is from Carly Davenport with Goldman Sachs, please proceed.
Unknown Speaker. Thank you.
Hey, good morning. Thanks so much for taking the questions.
Speaker Change: Maybe just a quick one on the balance sheet, you highlighted the actual 24 FFO to debt at 12.5%, recognize there's some more one-timey items in there. Can you just talk about the path to getting that back towards the 14% target for the planning period? And is that something that you view as sustainable sort of in each year of the planning period or could we see some variability there?
John Taylor: Hey Carly, it's John. Yeah, so if you think about where we were for 2024, you just kind of strip out some of those unique items that aren't in our plan.
John Taylor: for 2025. So, for instance, the $120 million payment we made to the SEC and OOCIC that
John Taylor: Significant storm in Cleveland, you just strip some of that out. You're close to the 14% in 2025. Then you add on the impact of the Pennsylvania rate case and the cash flow that's going to be generated.
John Taylor: with new rates effective January 1st. Our plan for this year is slightly above 14% and we believe that's sustainable going forward.
Speaker Change: Great, that's helpful. Thank you. And then maybe just one on on transmission for the the projects that were selected by PJM yesterday as part of the JV that you're part of with Dominion and AAP Are there any assumptions on those projects that are reflected in the current plan or what would you expect those to fall outside? of the scope of the current planning period
John Taylor: So Carly, let me start and I'll let John talk about the financing of it. We anticipate that our share of those projects will be about 675 million dollars about
John Taylor: about 625 of that is going to be in FET and the remainder of that is going to be in our owned operating company. So we view this JV as being a significant opportunity for us but there are some unique items around financing that I'll give to John.
John Taylor: Yes, Carly, so so so the CapEx that will be financed by the first energy companies is in our plan
John Taylor: The JV is going to be off balance sheet, so it'll be an investment that we have in that JV. And we'll have to make an equity contribution to that joint venture to capitalize it. But that CapEx would be financed off balance sheet and wouldn't necessarily be in our capital plan.
John Taylor: But everything else that we were awarded yesterday is in our financial plan.
John Taylor: Got it. Great. Thanks so much for the color. Thanks, Carly.
Speaker Change: Our next question is from Nick Campanello with Barclays. Please proceed.
Hey, thanks. Good morning.
Speaker Change: Blue Ridge Report and the Ohio rate case. And just now that you kind of have a marker out there, what are your thoughts on just being able to maybe settle some of these issues with staff? And is that is that possible? Or are you just going to be taking this the full distance to an order eventually? Thank you.
Speaker Change: So thanks, Nick. We always like to settle cases where we have the opportunity to do that. Of course, we'll be open to doing that in this case.
You know, the way
Speaker Change: Our cases have been going recently, there's been no regulatory overhang, but they have been going through to adjudicated settlements.
Speaker Change: Fortunately able to settle grid mod two. I think this one given the complexity, the nature, the length of time
Speaker Change: and the like. I anticipate this one will be fully adjudicated. That being said, we don't see any regulatory overhang. The Blue Ridge report was
It didn't have
Speaker Change: Attitude towards it. It seemed to be factual. It seemed to be based on the matters and almost entirely in the rate case.
Speaker Change: And, and I think, you know, I don't want to say too much about a case that we're currently adjudicating but we'll make our response and in the next 30 days and I anticipate this case moving forward as planned.
Speaker Change: You know, the commission has been handling these business as usual rate cases straight down the middle of the road, and I anticipate that they'll do that through the end of this, and we anticipate a constructive outcome similar to what we got in Grid Mod 2.
Hey, thanks for those comments. I definitely appreciate it.
Speaker Change: I guess just going back to the six to eight and your comments about being higher in the range.
Unknown Speaker You know, if
Speaker Change: If you're going to be higher in the range, just, I guess, why isn't this a 7 to 8 K gr and what's kind of what are you kind of handicapping or watching that would kind of put you lower at the more at the 6% level. Thanks. Yeah, so, you know.
Speaker Change: The traditional things that you would expect that would impact a utility's earnings, right? Regulatory outcomes, ability to get recovery, load, all the traditional things that you would expect, which is why we're focusing people on the core earnings.
Speaker Change: Things that could take us to the upper end of the range, you know, we've gotten in the last two and a half years, we've gotten about $2.5 billion of competitive transmission awards. I anticipate those will continue to come as load grows, as we see data center impacts and the like.
Speaker Change: We're not putting those in our plan yet, because we don't have them, similar to how we're not putting
Speaker Change: Data Centers that aren't contracted into our plan, but we have a significant pipeline there. So
Speaker Change: If the data center pipeline comes through and they go from being pipelined to contracted, if we have more of those
Speaker Change: Competitive Transmission Opportunities that we're able to secure. I think there are more tailwinds than there are headwinds, but we can't put them in the plan until we have them either contracted or awarded.
Thank you very much. Thanks, Nick.
Unknown Executive, Irene Prezelj
Speaker Change: Our next question is from Michael Lonnigan with Evercore ISI. Please proceed.
Michael Lonnigan: Hi, good morning. Thanks for taking my question. So as we think about your targeted consolidated earned ROE of
Michael Lonnigan: nine and a half to 10%. Is that the level you're assuming in this six to 8% core EPS CAGR? And you know, also what earned ROE contribution are you projecting from Ohio in the forecast period?
Michael Lonnigan: Yeah, Michael, this is John. So, so in the forecast period, we are assuming that we're going to earn on a consolidated basis somewhere in that nine and a half to 10%. And that's excluding the holding company activity. So FE Holdco, FET Holdco.
Michael Lonnigan: For Ohio, we're going to assume that we aren't close to our allowed return, whatever that is coming out of the rate case, which we think would be in that nine and a half to 10.5% range.
Michael Lonnigan: which we've talked about before, and, you know, we'll have to work our way through the rate case, but that's what we're assuming for Ohio.
Speaker Change: Great, thank you. And then you talked about dispatchable generation opportunity in West Virginia. I wonder if you could talk about the size of that investment opportunity, you know, when that could enter your plan. And then, you know, that along with the incremental transmission to capital from data center demand, the $350 million, what portion of all this capital could be funded with equity?
Speaker Change: Yeah, so let me first talk about the West Virginia component. We have about 3,000 megawatts of coal-fired generation that's going to be retired, that's planned to be retired, whether that happens or not, between 2035 and 2040.
So.
Speaker Change: If we were to start building for that eventuality, I could see the spend for that coming in in years four or five of our plan today and continuing beyond the 2029 period and extending throughout the 2030s.
If you look at
Speaker Change: 3,000 to 4,000 megawatts of combined cycle. I think you're talking a
You know
Speaker Change: 3 to 4 to 6 billion dollar potential spend over that, you know, 12 to 15 year period, which I think would make a lot of sense, replacing the thermal generation that we have and allowing for growth and economic development.
opportunities.
Speaker Change: I can't remember the second part of the question. What portion of all this incremental capital could be funded with equity?
Speaker Change: You know, I think you'd have to assume going forward that we would fund things from cash flow from operations.
Speaker Change: I think we would use debt and and we would also use a combination of equity and equity like instruments. So the traditional you know you ways that you would finance utility investment or what we would use for that and everything else that we have.
Great, thanks for taking my question.
Thank you, Wayne.
Speaker Change: Our next question is from Jeremy Tonant with JP Morgan. Please proceed.
Hi, good morning.
Good morning, Jeremy. How are you?
Good, good. How are you?
Unknown Speaker Good thing.
Speaker Change: Just want to come back to the no equity issuance in the message here and just wanted to see kind of like the boundaries of what could possibly change that. And, I mean, if anything happens, I guess, in this legislative session related to the ESPs or the rate case outcome just wondering if we could think about the cushion there, I guess, if anything goes bump in the night against expectation.
John: Yeah, Jeremy, this is John. So, so, you know, we're targeting 100 basis point plus of cushion in the metrics.
Speaker Change: and our forecast supports that today. I think as we think about incremental capital to this base plan that we have today, as Brian mentioned, I think we would finance that with a range of different options.
Speaker Change: But that's something that we'll have to take a look at. And I think it also depends on where that that capex is. Is it is it transmission related? Is it for looking formula rate related? So there's a lot of things that we would have to take into consideration as we think about our financing plan going forward.
Unknown Executive, Irene Prezelj
Speaker Change: Got it. That's helpful there. Thanks. And just want to come back to Bill Headroom, if we could. And, you know, your latest thoughts there, you know, post PJM and post the recent New Jersey auction as well. Just anything you could share with how you see Bill Headroom right now.
You know, we are either.
Lower than or equal to our in-state peers.
Speaker Change: When you look at our share of wallet, in terms of what our bill represents, it's less than 5% across our jurisdiction, so we're obviously aware of impact on customer affordability and are doing everything we can to keep
Bill is affordable.
Speaker Change: All the activity that we're taking in terms of trying to maintain flat O&M, only spending O&M where we have the authorization to do it and we have recovery for it, like in Pennsylvania, but we're very mindful of affordability, but on a comparative basis and a share of wallet basis, we think we come from a relative position of strength.
Speaker Change: Got it. That makes sense. I'll leave it there. Thanks. Thanks, Jeremy.
Unknown Executive, Irene Prezelj
Steve Fleischman: Our next question is from Steve Fleischman with Wolf Research. Please proceed.
Yeah, hi, good morning. So, hey, so just on
Steve Fleischman: Pension funding. Could you just give us an update of kind of where you ended the year on like funded?
Steve Fleischman: Status of the pension, I guess when rates go up, but that should actually be helpful. I think so.
Yeah, so we ended the year at about 84% funded.
and so probably flat to maybe slightly down from
Steve Fleischman: The last year, some of that is just the asset performance in the plan this year was lower than we had expected, which, you know, more than offset the lower liability associated with higher interest rates.
Unknown Executive, Irene Prezelj
Unknown Executive, Irene Prezelj
Okay.
Speaker Change: Totally separate question just on the Ohio consultant report and or just the rate case overall. I think Brian you just said you're going to respond in 30 days to it. Is there any other schedule?
Speaker Change: to the case at this point or is that yeah, just the rest of the schedule. Yes. So thank you Steve We don't have a procedural schedule yet in the case
Speaker Change: and we need to respond to the report 30 days from when it was issued, which was last Friday. So we'll be doing that timely, of course.
you know, a lot of the heavy lifting.
Speaker Change: of the analysis and work was done by Blue Ridge in that audit report, and now it's back and forth, people commenting on it, people talking about their views of it, as we'll all do when we respond, but I think we're on track.
Speaker Change: to get an order by the end of the year with that report getting filed when it did last week.
Speaker Change: Okay, and I guess last question just I'm not I don't know what what's going to happen with I guess curious your case of the bills pending in Ohio that might affect ESPs and whether since you've already filed a new one with that
Unknown Executive, Irene Prezelj
Speaker Change: Would that be okay? Since I think any changes will be prospective, not...
backward.
Brian Tierney: Yeah, so thank you for that Steve. We filed our comments in the proceedings that are going on in that, and we think whether or not you keep ESPs
We think the trackers that are in ESPs
are an important way for people that invest.
Brian Tierney: In utilities in the state to get more timely recovery than what you would get through a base rate case.
So if you just look at
Brian Tierney: The first energy companies we invest around a billion dollars annually in in the state of Ohio for us to wait for recovery of that investment to a base rate case doesn't make sense and it would really put
Brian Tierney: Ohio out of the mainstream of other states and the FERC.
Brian Tierney: who allow for some form of tracker, formula-based rate, or the like. So, whether you call it an ESP, having a tracking mechanism, or a formula-based rate,
Brian Tierney: is incredibly important to incentivizing investment in the state of Ohio. And I'd hate to see Ohio make a mistake on that and have that investment go to other states and have Ohio lose a competitive advantage for economic development.
Steve Fleischman: Got it. That makes a lot of sense. Thank you. Thank you, Steve.
Speaker Change: Our next question is from Andrew Wiesel with Scotiabank. Please proceed.
Hey, good morning, everybody. Good morning, Andrew.
Andrew Wiesel: Can you please talk a little bit about demand trends? You mentioned a couple times that sales were lower than expected. I know you pointed to weather, but even on a weather-adjusted basis,
Speaker Change: The full year was flat overall and weak in the residential and commercial segments. Any details you can give on the underlying trends, and particularly that commercial class, which was down a little bit. That's where data centers are included, right?
Andrew Wiesel: Data centers, Andrew, and our company are in the industrial sector.
Speaker Change: Okay, yes, I think that maybe you you see it other companies, you know, here's what I would say, you know, on load relative to residential
We saw some trends in Pennsylvania.
Speaker Change: That you know, they have an energy efficiency program there. They probably deployed
Speaker Change: You know close to a hundred million dollars just towards the residential sector
Speaker Change: to, you know, be more efficient with their energy usage. So we started to see some of that and it really started to come to fruition in the fourth quarter. But we really don't look at one quarter necessarily as a trend.
Speaker Change: And so, you know, we're going to see how that plays out over the next quarter or two. But that was what we saw.
Speaker Change: There could be a little bit of a return to office there as well. And we're looking at that but there's really, I don't have a good sense of that at this point in time. If you look at, you know, just the industrial sector.
Speaker Change: You know, I think in the fourth quarter alone, there was some steel customers that were offline that kind of threw the trend off. But we think that's going to rebound fairly nicely given what we're seeing, specifically in Ohio and Maryland with data center activity.
Unknown Executive, Irene Prezelj
Okay, great. Thank you.
Speaker Change: Then on the dividend, I know it's a board decision, but with the rebase earnings outlook to core as a payout ratio, you're a little bit above the high end of the targeted 60 to 70% range. Any thoughts on how we should think about dividend growth going forward relative to the 6 to 8% earnings?
Speaker Change: Yeah, so we were a little bit ahead as well in 2024. I think we're darn close to that range. And I anticipate that we're going to stay close to or inside that range going forward. You know, I think that
Speaker Change: Dividend will likely, as it has in the past, grow with core earnings, but I anticipate that the board may wanna take full advantage of the full range they have, but are comfortable with where we're coming in in 24 and where we anticipate coming in at 25.
Okay, thank you so much. Thank you, Andrew.
Our next question is from.
Anthony Craddell.
with Missoula Securities, please.
proceeds.
Hey, good morning, team. Morning, Anthony.
Speaker Change: Hey, I just had a quick follow up to Steve's question. I think it was related to Ohio legislation and particularly ESPs and you spoke about, you know, the benefits to Ohio if you have them, but in your prepared remarks, you talked about.
Speaker Change: You were going to, and I apologize if I'm summarizing it incorrectly, you're going to maybe chew up and move some items in the general rate case.
Speaker Change: to the ESP filing. I'm wondering if that legislation that you spoke about does happen to pass. Do you have the ability to move maybe things that you were looking to collect through the ESP back into the general rate case?
Speaker Change: It's a good question, Anthony. Of course, we would try to do that. Like we never want things to be hung out there that aren't being recovered. And I think a change in law would be something that we would move to make sure that we get timely recovery of. We never want things that aren't being recovered or paid for. And of course, we would try to do that if that became an eventuality.
There are other components.
Speaker Change: that will continue to be reflected in formula-based rates at places like the federal level. So if certain taxes were to change, for instance, we would be able to get those recovered fairly quickly through the federal formula-based rate annual mechanism.
Speaker Change: Have you guys quantified how much revenue you collect through the ESP?
Speaker Change: And I don't mind falling offline. I wasn't looking to put you guys in the weeds here. No, no, no. Just to give you a sense of it, you know, for 2025, the DCR revenue is held flat at $390 million.
Speaker Change: And then we probably collect, you know, less than $50 million right now on the grid mod AMI writer.
Speaker Change: Great. Thanks so much for taking my questions. The only thing I would say is, like, all of that will be collapsed to zero in the base rate case. It will move from the rider programs.
to base rates.
Speaker Change: But that will happen naturally through the base rate case procedure.
Speaker Change: So that's a really important part point that John's making. A lot of what's going on in the base rate case is resetting riders to zero and putting it in base rate cases. So in the base rate case, so either way, we will be significantly de-risking the component that we receive through riders in the ESV.
Speaker Change: So I don't mean to double dip then, it's not, you collected 440 in the ESP in 24, but I should not think that's 2026, because it gets reset to zero. Yeah, so you'll see a significant increase in base rates.
Speaker Change: The riders reset to zero and then they would restart again to collect on capital you've deployed since the test year of the base rate case.
Speaker Change: Perfect, thank you so much. Thank you for the question, Anthony, really important points.
Speaker Change: Thank you. We have reached the end of our question and answer session. And ladies and gentlemen, this does conclude today's teleconference webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.
Unknown Executive, Irene Prezelj