FirstEnergy Corp. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Hello, and welcome to the FirstEnergy Corp. First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
Thank you. Good morning, everyone, and welcome to FirstEnergy's First Quarter 2024 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.
Thank you, Irene. Good morning, everyone. Thank you for joining us today and for your interest in FirstEnergy. This morning, I will review financial performance and highlights for the first quarter, provide some updates on key regulatory developments and review FirstEnergy's shareholder value proposition.
Thank you, Brian, and good morning, everyone. Despite another mild winter, we are off to a good start this year with strong execution and financial discipline from our team that resulted in operating earnings above the midpoint of our guidance. And we are reaffirming our full year operating earnings guidance range of $2.61 to $2.81 a share, which represents a 7% increase versus the midpoint of our 2023 guidance.
[Operator Instructions] Our first question is coming from Shar Pourreza from Guggenheim Partners.
So Brian, I know obviously, Jon and Brian thanks for the color on the Ohio case, I think it touched on some of the questions I had on that. But look, the state is likely going to become sort of this epicenter for hyperscalers. So I guess I'm curious if there's going to be any sort of kind of data center-focused rate design or tariff filings in this case to maybe account kind of for these opportunities, especially to trying to balance the impact to other customers while trying to track this business? And then maybe just as a follow-up there, Brian, how is the dialogue going with data centers in general?
So let me start with the second one. The dialogue with data centers is really positive. We've been out to see Josh Snowhorn, and his team out of Quantum Loophole right outside of Frederick, Maryland, it's amazing what they have going on there. It's kind of fascinating to see. We have 2 230 kV lines that end in an open field where there used to be an aluminum smelter and now Josh and his team were building that huge data center complex. So we're in direct dialogue with them. They will be one of our biggest customers over time and look forward to continuing that dialogue.
Shar, that's a really good question. I think it's something that we will take a look at over time. Our tariffs are set up or such that some of these customers would be transmission-related customers. So the revenue uplift to the distribution companies wouldn't be as significant as you would see maybe in a residential customer, and that's by design. So it is something that I think over time we'll take a look at as well as I'm sure other utilities will take a look at. But at this point in time, we don't have anything that we're planning for.
Okay. That's perfect. And then, Brian, lastly for me and sorry, I got to ask this, but it's causing a little bit of angst this morning with investors. There's some new language in the queue kind of mentioning on potential fines coming from the OOCIC, I guess how do you book in the range of outcomes there? I know, obviously, the language is not going to be super material. But is there any kind of sort of read-throughs or knock-on effects on the ongoing PUCO investigations or any other investigations there?
I don't think so, Shar. Thanks for the question. There are 2 new things that we raised in that OOCIC disclosure. One was at the beginning of the disclosure, we talked about -- we have traditionally talked about there being nothing that we were aware of that was outside of the DPA.
Your next question today is coming from Michael Sullivan from Wolfe Research.
Maybe just -- I know you're about to file this year and I appreciate all the kind of upfront detail on Ohio. But maybe if you could just give a little more on how you are able to keep the rate hike request so low in Ohio after being out for so long?
Yes. So a lot of the activity that we're doing is taking things that have been handled in riders during that interim period and putting it in base rates. So things that customers were always paying for, but they weren't in base rates. So there's no customer increase associated with that. And then we're looking at refreshing the ROE, some cost structures, and we anticipate that those things will be $100 million or less in terms of gross increase, and we expect the net impact on customer rates to be less than 5%.
Yes, Michael, I'll expand just a little bit. If you think about rider DCR, that's been in place for over 10 years now and we've been able to earn on pretty much all of our investments in the distribution system over those 10 years. And to give you a sense of magnitude, that rider alone is close to $400 million annually. And then if you look at the Grid Mod rider, that probably got kicked off a few years ago with our Grid Mod I implementation, it's close to $100 million.
Okay. That's super helpful. Just a quick follow-up on that. With respect to the riders, does the outcome here in the next month in ESP V and how riders are treated there have any impact on how you approach the base rate case filing?
No, I don't think so, Michael. I mean, this is capital that has been prudently spent. It's been on distribution reliability. I think it's been subject to audits in the past. So I think that is simply going to be moved from those riders into base rates. And if you look at the past in other jurisdictions, you really don't have an issue with moving capital that you've deployed in riders in the base rates. That's typically fairly straightforward in any type of rate proceeding.
Okay. Makes sense. And last one for me, Jon. Just the -- congrats on getting back to IG and just what are we thinking for timing and prospects for maybe even mid-BBB, sounds like you have the metrics to support it. Is it doable at both agencies and potential timing there?
Yes. I'm not going to speak for the agencies, but S&P left us on a positive outlook. And I think they're looking for the expiration of the deferred prosecution agreement, which will be in July of this year. I think we also need to build a track record of hitting our forecast, and I think that's going to take some time to do that. And so that's what I think they're looking for and that's what our plan is.
Next question is coming from Jeremy Tonet from JPMorgan.
Just wanted to kind of touch base, I guess, on how things are progressing against strategic initiatives to kind of realign the organization, bring in new hires, decentralized decision-making and assigned KPIs further down the structure. How is that being received? How do you see, I guess, the culture changing? Just wondering any thoughts on how that's progressing?
Thank you for that question, Jeremy. It's progressing really well. So we've added Toby Thomas as the Chief Operating Officer; Wade Smith, as the head of FE Utilities; and we just announced John Combs coming in. And these folks are hitting the ground running, making an impact right away.
Got it. That's helpful. Good to see that there. And maybe following up on putting the dollars to work with regards to the Energize365 CapEx plan. Could you walk through the clean energy part a little bit more within the overall plan? And just wondering how that breaks down between solar energy efficiency, EV infrastructure, energy storage, different initiatives and how you see the timeline for that unfolding? And where could that go over time, I guess?
So a lot of it Jeremy, is some things that we're doing on the wire side to enable the energy transition. So you've seen 2 major pieces of that. One was the PJM Open Window 3. We're able to put $800 million to work. And the other is the New Jersey offshore wind transmission component where we're putting over $700 million to work. So significant components well over $1 billion in those initiatives, in addition to what we're doing with solar generation in the state of West Virginia on our way to rounding out a 50-megawatt commitment that we have there and would like to see 2 more of those 50-megawatt commitments as we get further subscriptions.
Yes, Jeremy, I'd just would add on a little bit. If you just look at the clean energy component of the $26 billion, it's a little less than 10% of the total portfolio. And like Brian said, a lot of that is in the state of West Virginia with the expected build-out of additional solar as well as the energy efficiency investments that we need to make in New Jersey to hit the state-required goals on consumption usage.
One final piece that we've gotten questions on also, Jeremy, is that the DOE GRIP program and whether or not we've made applications for that. We proposed 5 projects and 4 of them we were asked by the DOE to proceed. And they include everything like distributed energy management, AMI, grid resilience, smart grid and storage. And so about $500 million worth of projects we're moving forward with in the GRIP program and hope to get some positive results on that later this summer.
Got it. That's very helpful. And just one last one, if I could, regarding Signal Peak and recognize it's a shrinking part of the plan over time here. But I think there's just been some reports out there about BLM delays and how that impacts operations down the line there, whether it has to shut at a certain time. Just wondering any thoughts you could share with us there?
No disruptions in the mine that we're aware of. In fact, we have in the plan about $0.12 of earnings contribution for the year. They contributed $0.03 in the first quarter. So they're on track with their plan. So...
Your next question today is coming from Carly Davenport from Goldman Sachs.
Maybe just on the pension volatility, relative to what you've done so far, how good things like the proposals you've got in the Pennsylvania rate case around pension and OPEB recovery and the normalization mechanism impact the volatility levels that you see going forward?
Well, if we're able to successfully get the pension tracking mechanism, that goes a long way in deferring the volatility on to the balance sheet because essentially, you would be tracking to your test year expense and any changes from that point forward, both positive or negative to that would be deferred on the balance sheet. So the volatility would be significantly reduced if you're able to achieve some of those pension tracking mechanisms.
Carly, the beauty of that tracking mechanism is that the regulator is never wrong, like there's always the true-up. And so we're never making more or less than what we're asking for in rates, and it's always the right amount because it's based on the numbers. So we think it has a virtue that should be appealing to the regulators and others in our cases as well.
Got it. Great. That's super helpful. And then maybe just as you think about the balance sheet, are there any factors that we should be thinking about that could push the receipt of those remaining FET proceeds beyond the latter part of this year?
So they've already filed for application with the last co-investor and they've asked for accelerated approval. So I'm not anticipating any delay in that. So my expectation is that we should get the proceeds later this year.
Next question today is coming from David Arcaro from Morgan Stanley.
Maybe back on the Ohio rate case, I was wondering, are there any new mechanisms or new capital programs that we should watch for that might come with the filling? It didn't sound like it, but anything new that you would plan to bring into this case?
David, no, this will be a more traditional base rate case. I mean, obviously, we have the DCR in place, which really covers most of all of the capital in the Ohio companies, specifically targeting distribution reliability enhancements. So we'll have the Grid Mod program as well. So no new capital programs in this particular proceeding.
Grid Mod, which we do have a settlement in is a little over $400 million and that will allow us to get on parity with our in-state peers in that we're doing just the noncontroversial AMI implementation, which we hope to get. I just bought a house here in Akron. I've got 40-year old analog meter on my house. It would be nice to be able to have that AMI technology in place, and that's not controversial.
Got it. Got it. That makes sense. And then back on the topic of data centers, I was wondering how do you see the transmission opportunity growing over time in PJM? It sounds like you could be seeing greater load growth, whether it's in Ohio and Pennsylvania. Just what's the transmission CapEx upside opportunity that you're seeing? Is that growing rapidly potentially as we see data centers move to that region?
Yes. So it's a great question, Dave. It's -- I'll just say this, it's a little lumpy. So as these things are coming about, we're seeing things like the PJM Open Window 3, right? That was somewhat of an unanticipated opportunity that we don't have opportunities like that in our $26 billion plan. But as they come about, they'll be incremental to that plan. And so we've seen that process play out last year. I anticipate that we'll see more processes through future open windows from PJM as they're looking to build capacity on the grid to enable the type of load growth that data centers represent.
Got it. And I guess on that, just a quick follow-up. In your conversations with these data center customers, do you have a sense of the timing of when these are coming in and trying to connect to the grid when we could see a bigger increase in the load in interconnections coming?
Yes. So I'd say it's in the year's timeframe, but they're frequently getting more aggressive about wanting sooner, service, and that's all coming into things like their supply chain? Do they have the equipment necessary to put the equipment in, the cooling that they need, the generation that they need all those things. And so we have time to see it coming. But I think they're getting increasingly aggressive about wanting service sooner and quicker than what they had previously.
Your next question today is coming from Gregg Orrill from UBS.
Just another follow-up regarding the DCR and how you see that getting rolled into -- getting recovery around that? Is it going to be sort of along the timeline of the new ESP V? Or will it be tied to the base rate case? And how does that impact your guidance?
Yes. So our anticipation is that the accounts that we're recovering in the DCR should be fully recovered in either ESP V or the base rates. And there's been some discussion about that in the staff's filing and our responses. The accounts have been fully recovered for the last 12 or so years in the ESP V, and they've been audited and deemed appropriate and approved on an annual basis.
Your next question is coming from Anthony Crowdell from Mizuho.
Just hopefully 2 quick ones. One on the deferred prosecution agreement, is there a date in June where it expires? Or will there be an announcement or an office issue with a notice out?
Anthony, it's Jon. I think that's late July. It's not June. So it's late July. I think it's like the 20th or 22nd. And if we could make a filing prior to that, we'd like to be able to do that as well. Anthony, just meaning not wait until the absolute terminal date. If we've done everything we need to, to allow us to file sooner than that, we will.
If I take that with Shar's question earlier, you mentioned to clear that potential suit out -- suit up. Are those the last 2 items of deferred prosecution agreement and that potential loss that Shar had brought up earlier?
No. There's what we talked about earlier. There's the DPA, there's the securities case and then there are the audit cases in front of the Ohio Commission, which we asked if they could proceed currently and hopefully get those behind us as well.
Great. And then just lastly, the move to investment grade, was there any existing debt that maybe was triggered to a higher interest rate because you were sub-investment grade? And is there -- will that -- will those rates maybe trigger lower? And is there any significant interest savings going forward because of that?
Yes. So not meaningful interest savings, but with the Moody's upgrade, we had an interest rate step-up because we were sub-investment-grade. Now that's been eliminated, effective with the upgrade, although it will start with the next interest payment later this year. I think on an annual basis, that's less than $10 million. But nonetheless, I mean, it's meaningful. And then I think we also got some better pricing on the revolving credit facility by about 25 basis points.
Next question today is coming from Paul Patterson from Glenrock Associates.
Just a follow-up, I think it might have been Jeremy's question on Signal Peak. There's discussion about maybe being forced to shut down in 2025. Any thoughts there about how we should think about that? And if that happens, is it just a $0.12 maybe not being there? Or is there a potential for a negative EPS impact or something like that?
Well, so Paul, thanks for the question. As we've kind of outlined in the plan, Signal Peak was $0.12 this year, but we really had them going to a very de minimis level of earnings contribution beginning in '25 and beyond. So not significant to the plan in the grand scheme of things. And I don't think it would ever go to where we're incurring losses, but just kind of a breakeven proposition if it were to have to shut down.
Okay. Awesome. And then with respect to the Grid Mod settlement, is there any potential for having additional parties sign on to that? Or are we just going to go through what, I guess, has been outlined in the procedural [indiscernible] of the hearing examiners, are we pretty much just going to go down that road, do you think?
I think we're just going to go down that road, Paul. It's June 25 is when I think we're expecting to have the hearing on it. And we have a majority of the intervenors signed on to the settlement. And there's -- like there's really nothing controversial about it. It's -- we're just trying to deploy the AMI that all the other in-state peers are either at or close to 100% of, we're trying to round out and finish the remaining 2/3 of our customers on.
Okay. Great. And then this has been a topic that's been coming up a lot in policy circles about trying to get more grid-enhancing technologies to be deployed as opposed to the substantial build-out and all the issues that are being seen with that in terms of cost and timing and stuff. I'm just wondering how do you think about grid-enhancing technologies, and do you have any thoughts about how they might be deployed at FirstEnergy or industry-wide?
Yes. So there are our responses to the GRIP, I think, are grid-enhancing technologies, grid resilient, smart grid storage, DERMS and the like. And so with the Department of Energy, we're looking to take that money that they're looking to help jump start some of those initiatives and get our fair share of those investment for the benefit of our customers. That's about $500 million of investment that we're looking to. And the Department of Energy is looking to put those dollars to work and make these pilots a reality, and we're looking to take advantage of that for the benefit of our customers.
Okay. But you don't expect any -- do you expect any widespread adoption of those in the near-term? Or beyond just the pilots and the DOE funding and what have you? Is there any sense -- I know it's kind of a big question, so I apologize. I guess -- I mean, do you see the -- how do you -- do you see this as -- what the potential opportunity or threat might be associated with these technologies being deployed?
I don't see it as being strategically disruptive for our industry. These new technologies, it's -- I think it's best to take a crawl-walk-run approach. And you've seen that in other places in the industry, Paul, not as big of a deal for us, but things like carbon capture and sequestration, right, to do it at a plant level, I don't think has been done on a commercial scale in this country with a coal-fired power plant.
Next question is coming from Angie Storozynski from Seaport Global.
So I'm just wondering, so all these additions of data centers, especially those that are reliant on renewable power assume that there's a well-functioning grid with de minimis congestion issues. That doesn't seem right to me at least. And I was starting to hear from other PJM, wires on the utilities that they might be forced to building generation assets, again, and granted not maybe the next year or 2, but in the foreseeable future.
That's a really good question, Angie. We're having more and more discussions with regulators and other companies around the issue that you identified, which we're kind of calling resource adequacy. And certainly, it's something that people are talking more and more about it. You can't just have a robust wire system. You have to have a commodity to put on the wires. And so our 5 states have sort of different stances relative to that.
And then changing topics on interest rates. So we're starting to hear from some of the utilities that they were counting on some tailwinds from interest rates in the back half of the year. I mean that might still happen. But just wondering how do you see your growth plans and your financing plans and especially from an EPS perspective, if we -- if this current interest rate environment were to persist beyond this year?
Yes, Angie, so in our plan for this year, the planned coupon rate for all new debt deals was 5.75%. And then we had it elevated through the planning period over the 5 years. And so it is something that we'll keep an eye on. If you look at the 2 bond deals that we've done this year, it's on a blended basis, it's right at 5.75%. So we feel good about that, and I think we'll just have to keep an eye on interest rates.
We reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.