FirstEnergy Corp. (NYSE:FE) Q3 2023 Earnings Call Transcript
FirstEnergy Corp. (NYSE:FE) Q3 2023 Earnings Call Transcript October 27, 2023
Operator: Greetings and welcome to the FirstEnergy Corp. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Irene Prezelj, Vice President, Investor Relations and Communications for FirstEnergy Corp. Thank you. Ms. Prezelj, you may begin.
Irene Prezelj: Thank you. Good morning, everyone and welcome to FirstEnergy’s third quarter 2023 earnings review. Our President and Chief Executive Officer, Brian Tierney, will lead our call today and he will be joined by Jon Taylor, our Senior Vice President and Chief Financial Officer. Our earnings release, presentation slides and related financial information are available on our website at firstenergycorp.com. Today’s session will include the use of non-GAAP financial measures and forward-looking statements. 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.
Brian Tierney: Thank you, Irene and good morning everyone. Today, I will discuss third quarter and year-to-date results, some key developments over the last few months and our outlook for the future. For the third quarter, we delivered GAAP earnings of $0.74 per share versus $0.58 last year. Operating earnings for the third quarter were strong at $0.88 per share at the upper end of our guidance range and compared favorably to $0.79 per share last year. Our financial performance was a result of discipline and operating expenses as well as execution of our regulated capital investment plan to improve system resiliency and reliability. Also, as previewed on the second quarter call, we realized a tax benefit in the quarter related to a state tax adjustment, which reduced our effective tax rate to 17% for the year-to-date period.
Our service territory continued to experience very mild temperatures impacting earnings by $0.06 per share compared to last year. In addition, quarterly results were impacted by lower pension credit and higher financing costs, primarily as a result of higher debt balances used to fund our capital investment program. Through strong execution by our treasury group, our consolidated long-term borrowing rate remained essentially flat. For the year-to-date period, we reported GAAP earnings of $1.66 per share versus $1.42 per share last year. Operating earnings for the 9-month period were $1.94 per share compared to $1.91 in 2022. As you know, we have faced some headwinds in 2023 from both the impact of market conditions to our pension plan and the impact of the extremely mild temperatures on distribution sales.
Our employees have risen to these challenges by focusing on the things within our control, allowing us to meet our financial commitments despite these headwinds. Examples include demonstrating financial discipline. Our employees were able to reduce base O&M by over $130 million or 13% year-over-year by executing on various continuous improvement initiatives. Employees executed on our capital plan with CapEx increasing $410 million year-to-date, mostly in transmission, which is 50% ahead of 2022 levels. Our treasury organization executed on a strategic low cost of capital, convertible debt issuance that was used to retire high cost debt and fund our pension. Jon will discuss these drivers and others in more detail in just a few minutes. The key takeaway is that we have had tremendous operational and financial execution to allow us to meet our targets.
We intend to build on this performance, continue to change our culture and improve resiliency and reliability for our customers. We are providing a fourth quarter guidance range of $0.55 to $0.65 per share, which assumes normal weather. We are also narrowing our 2023 operating earnings guidance range to $2.49 per share to $2.59 per share from our original range of $2.44 per share to $2.64. In addition, we are reaffirming our 6% to 8% targeted long-term growth rate off of the original midpoint of prior year’s guidance. Before I move to key developments in the quarter, I want to address a couple of other topics. First, I want to briefly address the Ohio Organized Crime Investigation Commission, subpoena. We have no new material update at this time, and we continue to cooperate with the commission and address their questions.
Their focus continues to be on activities that were detailed in the deferred prosecution agreement with nothing new. FirstEnergy has taken full responsibility for those activities and implemented corrective actions to ensure that those type of activities never happen again. We will continue to cooperate with the OOCIC as we focus on executing our strategy and fulfilling our vision to transform FirstEnergy into a top-performing utility. The last subject before we move on is that I believe we are uniquely well positioned for the current interest rate environment. We expect to close on the FET transaction early next year and to receive the full proceeds of $3.5 billion in 2024 with the majority funded at close. In addition, our debt maturities are light over the next couple of years, on average, approximating 6% of our total debt outstanding.
This positioning supports our robust capital plan. This year, we are on track for $3.7 billion in capital investments, up from our original plan of $3.4 billion. In 2024 and 2025, our planned capital investments are $3.9 billion and $4.1 billion, respectively. This brings our total capital investments over the 3-year period to approximately $12 billion. This capital investment plan is comprised of 47% transmission and 51% distribution, supporting 7% rate base growth over the period and we’re reviewing additional investments to serve our customers. Turning to Slide 6. Let’s review some recent key developments. In September, our Board declared a quarterly dividend of $0.41 per share payable December 1. This represents a 5% increase compared to the quarterly payments of $0.39 per share paid since March of 2020.
The increase corresponds with our targeted payout ratio of 60% to 70% that was approved by the Board earlier this year. It sets the stage for future dividend growth that is aligned with our long-term operating earnings growth as we continue to work – as we continue working to enhance value for investors. During the quarter, we also achieved some important regulatory milestones that support our strategy of investing to improve reliability, resiliency and the customer experience. On October 18, the Maryland Public Service Commission approved our distribution base rate case including a $28 million revenue increase that supports equity returns of 9.5% and an equity ratio of 53%. We are pleased with this outcome, which support continued investments in the state and helps us deliver on our commitment to providing dependable and affordable electricity to our customers in Potomac Edison’s Maryland service territory.
We are also excited to move forward with the first of our 3 utility-scale solar generation sites in West Virginia, totaling 30 megawatts of capacity. Our proposal, along with the small construction surcharge was approved by the West Virginia Public Service Commission in August. We plan to seek approval from the PSC to build an additional 2 solar sites, representing another 20 megawatts once customer subscriptions reach the 85% threshold. Jon will address the regulatory items and discuss the progress we’re making with other filings, including the Pennsylvania consolidation case and our rate proceedings in New Jersey, Ohio and West Virginia. We are focused on making the necessary investments in our regulated businesses, our employees and in systems and our systems to enhance the customer experience and create new opportunities from the energy transition.
To execute that vision, we are shifting decision-making and accountability closer to where the work is being done to serve customers. We are making progress to fill several key executive positions in an organization that will be structured to allow greater execution at the business unit level. In the near future, we expect to announce a President, FirstEnergy Utilities, as well as a Chief Operating Officer. President, FirstEnergy Utilities, will oversee 5 business unit executives who will lead our state operations and our stand-alone transmission companies. In our new organization, the business unit executives will have P&L responsibility and will be accountable for regulatory direction and outcomes as well as operational performance. The Chief Operating Officer, will lead the customer experience group and a range of T&D functions, including planning, construction, system operations, safety and compliance.
Five months into my role, I’m more excited than ever about the future of FirstEnergy. We are building a strong foundation of operational and financial excellence. We are using our strengthened balance sheet to invest in our people and our system for reliability, resiliency and in support of the energy transition. We are poised to capitalize on these opportunities to continue to grow the company and create a strong investment opportunity for investors. Thank you for joining us today. I look forward to seeing many of you at the EEI Conference next month and talking more about the progress we’re making at FirstEnergy. Now I will turn the call over to Jon for more financial detail.
Jon Taylor: Thank you, Brian, and good morning, everyone. We had a strong quarter, which showcased our commitment to operational excellence and financial discipline. This work enabled us to offset the impact of continued unseasonably mild temperatures across our service territory and deliver operating results near the top-end of our guidance. In addition, we’re also making good progress on our regulatory initiatives, which I’ll review in more detail in a few minutes. Let’s start with a review of our financial performance. As Brian mentioned earlier, third quarter GAAP earnings were $0.74 a share and operating earnings were $0.88 a share. This compares to 2022 third quarter GAAP earnings of $0.58 a share and operating earnings of $0.79 a share.
And on a year-to-date basis, operating earnings are $1.94 a share compared to $1.91 a share in 2022 despite significant headwinds from our pension plan and lower weather-related distribution sales. Our performance in large part is due to intense focus on our operating expenses. Lower company-wide O&M improved operating results by $0.08 a share in the third quarter and $0.21 a share on a year-to-date basis, representing a 13% reduction when compared to the first 9 months of 2022. And our expectation for the full year is an O&M reduction of roughly 15% versus 2022 levels. About 50% of that is unique in nature, including spending we accelerated in 2022, with the other 50% being sustainable cost reductions that we will build upon in 2024 and beyond, primarily related to improved productivity across the entire organization, reduced use of contractors and lower spending on branding and advertising, just to name a few.
We’re also running ahead of plan with capital spending in both our transmission and distribution businesses. Strong planning and execution across our operations and supply chain teams as well as the need to respond to more severe and capital-intensive storm events, resulted in an increase to our 2023 forecasted capital investment of nearly $300 million to $3.7 billion from our original plan of $3.4 billion. Looking now at the drivers for each of our business units for the third quarter. Results in our distribution business benefited from the diligent focus on operating expenses as well as our formula rate capital investment programs and rate structures. Together, these helped to offset the impact of a lower pension credit, higher financing costs, mostly associated with new debt issuances and the impact of mild weather on distribution sales.
Mild summer temperatures with cooling degree days 17% lower than the third quarter of 2022 and 6% below normal drove a 3% decrease in total customer demand and impacted earnings by $0.06 a share compared to last year. Sales to residential customers decreased nearly 4% compared to the third quarter of 2022 resulting from a 6% decrease due to the mild summer weather, partially offset by a 2% increase on a weather-adjusted basis. Year-to-date, weather-adjusted usage in this customer class is about 2% higher than our forecast and last year, and about 5% higher than 2019 pre-pandemic levels. In the commercial sector, demand decreased just over 1%, resulting from a 2% decline in the mild temperatures but increased over 1% quarter-over-quarter on a weather-adjusted basis.
Year-to-date weather-adjusted usage is flat to last year and continues to lag pre-pandemic levels by about 5%. Finally, sales to industrial customers were flat compared to the third quarter and year-to-date periods of 2022 and remain slightly lower than pre-pandemic levels. Looking at our transmission business, third quarter results increased as a result of rate base growth of 8% associated with our energizing the future investment program. So far this year, we deployed $1.2 billion of capital in our transmission business, an increase of $400 million or 50% versus last year and nearly $200 million or approximately 20% above our plan. Highlighting just a few of the many projects currently underway, in Northeast Pennsylvania, we’re rebuilding 20-mile 115 kV transmission line to enhance service reliability and improve system resiliency.
In Ohio, we’re rebuilding a 20-mile section of a 138 kV power line in Belmont and Harrison Counties which is in the third phase of a larger 64-mile project to enhance service reliability, improve system resiliency and accommodate increasing customer demand. And in West Virginia, we’re upgrading 4 miles of a high-voltage transmission power line in Preston County to reinforce local transmission system against severe weather, meet future energy demands of the region and enhance service reliability for 5,000 customers in the Kingwood area. For the full year, we now anticipate transmission formula rate investments of over $1.8 billion versus our original plan of just under $1.7 billion. In our corporate segment, our results for the third quarter largely reflect the tax benefit from the expected use of state net operating loss carry-forwards, which we discussed on the second quarter call that reduced our consolidated effective tax rate for the year.
As Brian mentioned, throughout 2023, our consistent operational and financial execution, including growth from our investment plan, significant cost control and other financing and tax benefits has more than offset the headwinds from pension and the impact of lower weather-related distribution sales which for the first 9 months of this year impacted results by $0.18 per share versus normal. I’m proud of how all of our employees have addressed these challenges and supported our commitments. While 2023 is not over, our 2023 debt financing plan is now complete, with 6 long-term debt transactions at our regulated operating companies totaling $1.6 billion, with an average coupon of 5.41%, slightly below our plan of 5.5%. Also earlier this year, FE Corp.
issued $1.5 billion of convertible debt with a coupon of 4% that allowed the company to refinance revolver borrowings costing more than 7% and to make a voluntary pension contribution to eliminate minimum funding requirements in 2025. Additionally, earlier this month, we extended the maturity date on our $4.5 billion revolving credit facilities to October 2027 and added 2 new revolving credit facilities, including a $1 billion facility at FET LLC and $150 million facility at CatCo. Moving forward, we will have $5.65 billion of credit facilities to support our increasing capital programs. As we look to 2024 and 2025, our debt financing plan is minimal since the majority of the FET asset sale proceeds will be received at closing, with the remainder anticipated before the end of 2024.
We plan to use these proceeds to repay costly revolver borrowings and depending on the interest rate environment will be used to redeem high coupon holdco debt, such as the 738 notes of which $460 million remain outstanding, retire maturing utility debt and/or defer other utility debt issuances. The funding from the FET transaction, our light debt maturity schedule plus the decision we made to issue the low-cost convertible debt provides significant flexibility with our utility debt financing plan, which other than refinancings and new money requirements at our stand-alone transmission companies could be as low as $2.1 billion over the next 2 years. And as for FE Corp’s holdco debt, we only have $300 million that matures in 2025. All that said, we’re uniquely well positioned for the current interest rate environment with minimal earnings sensitivity to interest rate increases over the next couple of years.
Now let’s turn to an update on our rate proceedings and other regulatory activity. As we’ve discussed, we filed three base rate cases earlier this year, representing more than $7 billion of rate base. As Brian said, last week, we received an order in the Maryland base rate case that aligns with our goals to continue meeting the energy demands of Potomac Edison’s rapidly growing population. The order authorized an equity capitalization ratio of 53% with an equity return of 9.5%, recovery of regulatory assets associated with both COVID and electric vehicle infrastructure, while also providing support to help our strategy of strong reliability and resiliency in support of the energy transition. The new rates went into effect October 19. We’re also happy with the progress on the New Jersey and West Virginia base rate cases.
In New Jersey, we’ve entered into settlement discussions on our proposed revenue increase of $192 million, and in West Virginia, our hearing is set for late January and our $207 million base rate case with new rates expected to be effective in March of next year. Other recent regulatory updates include in Pennsylvania, FERC approved our application to consolidate our four Pennsylvania distribution utilities in August, and the parties to the case filed a settlement agreement with the Pennsylvania Public Utility Commission on August 30. The settlement includes $650,000 in bill assistance for income-eligible customers over 5 years, supports unification of rates over time and includes a tracking mechanism to share certain cost savings associated with the legal entity consolidation with customers.
With the ALJ’s recommended approval of the settlement, which is pending final regulatory approval, we expect the consolidation to close by early 2024. This consolidation aligns with our state operating model is an important step to simplify our legal entity structure and increase the flexibility and efficiency of our financing strategy. In Ohio, hearings for our Grid Mod II filing are scheduled to begin in December. This 4-year $626 million capital investment plan will support our continued work delivering safe, reliable power, offering modern customer experiences and supporting emerging technologies. And in November, hearings are scheduled to begin on our fifth Ohio electric security plan which supports our generation procurement process for non-shopping customers as well as investments in the distribution system, storm and vegetation management riders and energy efficiency programs.
Our proposal also supports low-income customers and electric vehicle incentives. We have requested approval for the new ESP effective June 1 of next year. In West Virginia, we reached a unanimous settlement in our depreciation case, with an agreed-upon $33 million increase in depreciation rates, those rates will be effective upon conclusion of the West Virginia base rate case. And as Brian discussed, we received approval from the West Virginia Public Service Commission in August to move forward with construction of the first three utility-scale solar generation sites in the state. We expect the first site to be in service by the end of this year and all five sites to be completed before the end of 2025. And at a total investment cost of approximately $110 million.
Just as a reminder, summaries of our key filings together with news releases and links to dockets are all available on the regulatory corner section of our Investor Relations website. Looking ahead, we plan to file our New Jersey infrastructure investment program in the next few weeks. And as you know, we are preparing for an active regulatory calendar in 2024. The performance of our team has been second to none by focusing on what we can control and a commitment to continuous improvement. We’ve delivered outstanding operational and financial performance. We’ve overcome the impact of historic unseasonable weather and other challenges to deliver solid results through the first 9 months of this year. We’re on track to meet our financial commitments, and we’re building a strong foundation for continued growth.
Thank you for your time today. Now let’s open the call to your questions.
Brian Tierney: Hey, Jon, real quick, before we go to Q&A, I’d like to share some late-breaking news from last night. Yesterday evening, PJM released the results of its open window process to address reliability concerns with data center load growth in the Dominion and APS service territories. Based on our preliminary review of these results, we are on track to gain a substantial portion of the projects. The recommendations still need to move through TAC and the PJM Board, but we anticipate that happening by year-end. While these projects won’t come to fruition until the latter half of the decade, we’re really excited about this opportunity. It builds on our successful bid for the onshore transmission construction that supports New Jersey’s offshore wind project, and it further highlights the significant transmission build-out we anticipate in our footprint to support the energy transition.
We look forward to talking more about this opportunity at EEI once we’ve had a chance to fully understand the details. Now let’s move to your questions.
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