FirstEnergy Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 22, 2022

There are 12 speakers on the call.

Operator

Greetings, and welcome to the FirstEnergy Corp. First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

At this time, it is now my pleasure to introduce your host, Irene Prezel, Vice President, Investor Relations for FirstEnergy Corp. Thank you, Ms. Prezel. You may now begin.

Speaker 1

Thank you. Welcome to our Q1 2022 earnings call. Today, we will make various forward looking statements regarding revenues, earnings, performance, strategies, prospects and other matters. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by these statements can be found on the Investors section of our website under the earnings information link and in our SEC filings.

Speaker 1

We will also discuss certain non GAAP financial measures. Reconciliations between GAAP and non GAAP financial measures, the presentation that supports today's discussion and other detailed information about the quarter year Can be found in the strategic and financial highlights document on the Investors section of our website. We'll begin today's call with presentations from Steve Strah, Our President and Chief Executive Officer and John Taylor, our Senior Vice President and Chief Financial Officer. Several other executives will be available for the Q and A session. Now I'll turn the call over to Steve.

Speaker 2

Thanks, Irene, and good morning, everyone. Thank you for joining us We're off to a solid start in 2022. Yesterday, we reported GAAP earnings of $0.51 per share and operating earnings of $0.60 per share in line with the midpoint of our guidance. With our financial performance, operational momentum, portfolio of assets and robust long term business model, We are in a strong position, and I'm optimistic and excited about the future. Today, we are reaffirming our operating earnings guidance of $2.30 to $2.50 per share for 2022 And growth of 6% to 8% thereafter based on our 5 year $17,000,000,000 investment plan.

Speaker 2

And while the dividend is subject to Board approval, I can affirm that we will still expect to maintain our annual dividend rate of $1.56 per share this year with the objective to grow the dividend within our payout ratio as earnings increase Strong foundation and unrelenting focus on our customers and a leader in the energy transition. Over the last couple of years, we've asked a lot of our employees as we implemented a series of changes From Epi Forward Initiatives to our enhanced values, numerous updates to policies and procedures and multiple training Sessions across the company, our employees have accomplished a lot and they have done this while executing at a high level across the company. I am very grateful for all of them and incredibly appreciative of their work and strong performance over the many years, But especially over the last 18 months, I am very proud of what they have done. Building off this momentum, we believe that our employees and culture will be the single most important value drivers of our long term strategy. Earlier this year, we formed a cross functional culture transformation working group to consolidate, Coordinate and streamline our numerous initiatives designed to drive culture change with the goal of making these changes meaningful and impactful to employees.

Speaker 2

By better aligning our culture initiatives and narrowing the focus With a simpler integrated culture change roadmap for 2022, we can help employees make meaningful steps in a few areas at a time. The outcome of this work resulted in identifying 3 key focus areas For our culture transformation for 2022, embedding our refreshed values integrity, safety, DE and I, performance excellence and stewardship into every aspect of our culture, Fostering an open, trusting environment where leaders create opportunities for two way dialogue and employees feel valued and empowered and improving advancement and development opportunities for our employees. We are supporting these efforts by consistently demonstrating our values and action in communicating with employees, Creating a culture champion network to support our transformation efforts facilitating listening sessions Hosted by me and other members of our senior leadership team, along with small group employee discussions and quarterly speak up sessions that encourage open and transparent two way dialogue And enhancing our focus and accountability around more robust meaningful discussions between employees And their supervisors that support career management and development. We're striving to empower employees To make their jobs more meaningful and encourage the candor and collaboration that can make our company more innovative, customer focused And a great place to work.

Speaker 2

Changing a culture takes time, trust and persistent modeling, As well as alignment with our employees' personal values and needs. I am deeply committed to this as is our leadership team, And we view it as critically important work. By listening, being more open and transparent, We can do better and produce better results for all of our stakeholders, including our employees, customers and investors. Taking a more open and engaged approach is also a cornerstone of our efforts to prioritize our customers And enhance the customer experience. Last month, before winter utility disconnection moratoriums lifted in our areas, We launched an enhanced campaign to engage residential customers who may be facing financial hardships.

Speaker 2

We recognize that many customers in this position don't reach out for help and they may be unaware of the various utility Bill assistance programs available to them. To reach these customers, we produced a video message Featuring several members of our customer service team. They spoke passionately about their desire to assist customers, And we've raised awareness of various programs and payment options that might help during these difficult times. Our goal was to reach out and invite customers to come to us for help. At the end of March, We had more than a quarter 1000000 customers enrolled in utility assistance programs with $71,000,000 in funding applied to those accounts.

Speaker 2

Compared to the Q1 of 2021, that's an increase of more than 17% And contributions directly benefiting customers enrolled in these assistance programs this year. This effort also contributed to a continued decline of past due balances, which are now on par with pre pandemic levels As we discussed on our Q4 call, Epi Forward is our engine for optimizing our organization and customer focused initiatives, including numerous projects designed to enhance communications, self-service options and provide better experiences for customers who are in need of assistance. For example, We've recently enhanced our website to make it easier for customers to understand and pay their bills. Identify assistance programs and avoid service disconnection. From an organization standpoint, now that we've aligned our utility operations into a 5 state model To enhance collaboration, streamline processes and maximize efficiency, we are beginning a longer term review to consider the possible benefits of combining our Ohio entities as well as those in Pennsylvania from a legal, financial, operational and branding perspective.

Speaker 2

And finally, FEFORWARD will improve productivity And our cost structure through investments in digital technologies, upgrading and integrating key systems and using data to help us make better, more efficient decisions for our customers. Through these investments, We anticipate significant productivity improvements, substantially reducing the need for high cost external contractors that augment Our workforce today, our commitment to prioritizing customers also means providing excellent service And preparing for the grid of the future, in Ohio, we are nearing the end of the first phase of our Grid Mod program, which began in 2019 and includes investments in smart meters, distribution automation And voltage regulating equipment. The program also supports our advanced distribution management system That is being installed to help automate the outage restoration process and optimize grid performance. We're excited about the benefits these investments can provide to our customers, including enhanced reliability, Improved power quality and greater visibility into their electricity usage. We plan to file for a second phase grid mod investments in Ohio in the 3rd quarter to continue this successful program.

Speaker 2

In New Jersey, JCP and L received approval from the BPU to begin installing smart meters On customer homes and businesses in 2023. The approved plan includes A capital investment of $421,000,000 for the installation of more than 1,100,000 smart meters Over a 36 month period. Across our entire footprint, our utilities have installed more than 2,700,000 smart meters Since 2014, with implementation efforts nearly complete in Pennsylvania and currently underway in Ohio. In New Jersey, we are working toward a settlement of our proposed EV driven program. The 4 year program is designed to accelerate the adoption of light duty electric vehicles with incentives and rate structures That would support the development of an EV charging infrastructure throughout our JCP and L service territory.

Speaker 2

We are also making solid progress to complete our sale of a 19.9% stake in FET to Brookfield. Last week, CFIUS notified FET and Brookfield that it's determined there were no unresolved national security issues Its review of the transaction was concluded. And yesterday, FERC issued its orders on the pending applications For Blackstone's designee to serve as a voting member on the FE Corp Board and for authority to close the Transaction with Brookfield. We remain on track to close the sale of the FET minority interest standing litigation in order to provide certainty to stakeholders and focus our attention on the future. Last week, we reached a settlement in the ratepayer civil RICO lawsuit in the amount of $37,500,000 We previously recognized a reserve for this settlement in our Q4 2021 earnings.

Speaker 2

I'm looking forward to working with our refreshed Board, including new nominees, Sean Klimczak of Blackstone and Jana Krum, Who is the Chief Financial Officer for Kimball Electronics. At the same time, I'd like to express my sincere appreciation To our outgoing Board members, Don Michoff, Mike Anderson, Julia Johnson, Tom Mitchell, Chris Pappas And Luis Reyes, I am very grateful for their expertise and guidance. Thank you for your time today. We are committed to continue delivering financial and operational excellence as we execute our long term business strategies And transform our company into a more innovative, resilient and industry leading organization. Now I'll turn the call over to John for a financial update.

Speaker 3

Thanks, Steve, and good morning, everyone. Thanks for joining us. As Steve said, we're off to a solid start this year. Our first quarter GAAP earnings of $0.51 per share And operating earnings of $0.60 per share were in line with the midpoint of our guidance. Excluding the impact of our recently issued equity, Rate credits provided to Ohio customers under our PUCO approved stipulation last year and accounting policy changes, Operating earnings increased by $0.03 per share compared to the Q1 of 2021.

Speaker 3

Our first quarter results include several special items, the largest being a $0.06 per share charge associated with the redemption and early retirement of an $850,000,000 FE Corp note in January of this year. Excluding the items I mentioned, Results in our distribution business decreased slightly, but were consistent with our business plan. The year over year change was primarily driven by A slight increase in operating and other expenses primarily related to planned plant outages in West Virginia And higher storm costs and employee benefits, partially offset by lower uncollectible expense. These costs were partially offset by higher customer demand and the continued economic recovery in the commercial and industrial segments. It's important to note that our operating costs were in line with our forecast as discussed on the Q4 call.

Speaker 3

Our total distribution deliveries increased 3.6% compared to the Q1 of 2021 and were only slightly off our load forecast For the Q1, breaking the year over year impact down by customer class, we saw a 2.2% increase in residential demand Due primarily to weather and on a weather adjusted basis, customer usage decreased only slightly versus the Q1 of 2021 as customers continue resuming normal work and social activities. Deliveries to commercial customers increased 7.6% And 4.7% on a weather adjusted basis, which is a significant increase in this customer class. While sales to industrial customers increased 2.5% with many sectors, including steel and automotive, Showing recovery from recessionary conditions. Overall customer demand continues to slowly return to pre pandemic levels. Our 1 year residential sales trend is about 3% higher than 2019 levels, while commercial and industrial deliveries remain about 4% and 2% below 2019.

Speaker 3

In our transmission business, 1st quarter results increased $0.03 per share, primarily due to rate based growth associated with our ongoing investments in our Energizing the Future program. And in our corporate segment, our results compared to the Q1 of 2021 primarily reflect lower interest expense and higher investment returns. In addition to our earnings guidance, we are on track to meet our cash from operations target of 2,600,000,000 to $3,000,000,000 this year and improve operating cash flow consistent with earnings over time. We met with the rating agencies earlier this month and had a good conversation about our progress, including our ongoing efforts to improve our balance sheet and strengthen The credit profile of FirstEnergy as we work to reach 13% FFO to debt by 2024, targeting mid teens thereafter. As Steve mentioned, we're on track to close the FET transaction in the Q2.

Speaker 3

As we said, we plan to use a significant portion Of the $2,400,000,000 in proceeds from the Brookfield transaction, together with the $1,000,000,000 Blackstone Equity Investment To strengthen our balance sheet by reducing debt or debt like obligations and to fund our capital program. In addition to the $850,000,000 EthiCorp note we retired in January, we plan to retire an additional $500,000,000 At the corporate level after the Brookville transaction closes and recapitalize certain operating companies to enhance their credit metrics and capital structures. Later this year, we'll make a determination on the deployment of the remaining $800,000,000 which could be used for a voluntary pension contribution, Further reductions in FE Corp debt or to fund CapEx. As we have mentioned previously, 2022 is a light year On the debt financing front, with up to $750,000,000 of planned debt issuances. However, steep increases in interest rates and market volatility have impacted our pension plan.

Speaker 3

As of the end of the Q1, the discount rate for our pension obligation Increased nearly 75 basis points or 25 percent to 3.75 percent, while the assets in the pension plan Had close to a 6% loss for the quarter. While the funded status has improved from 82% at the end of 2021 to 84%, The volatility in the interest rate and equity markets has created a potential headwind for higher pension expense in 2023 beyond. This is something we will continue to watch throughout the remainder of the year, but we are already thinking through different opportunities To offset this potential headwind, yesterday, we affirmed our 2022 operating earnings guidance and provided guidance for the 2nd quarter $0.46 to $0.56 per share. Given the number of moving pieces we have this year, We recognize consensus estimates by quarter are somewhat challenging for analysts at the moment, and we appreciate your work to get through this period with us. We're off to a solid start this year and we've got an excellent transformation plan to continue becoming an industry leading company Focused on long term value for investors, customers, our communities and employees.

Speaker 3

As always, I appreciate your time And your interest in FirstEnergy, now we'll open the line for your questions.

Operator

Thank you. We'll now be conducting a question and answer session.

Speaker 4

Thank you.

Operator

Thank you. And our first question is from the line of Jeremy Tonet with JPMorgan. Please proceed with your question.

Speaker 5

Hi, good morning.

Speaker 2

Good morning, Jeremy. How are you?

Speaker 6

Good, good. Thanks. Just want to start off, I guess, with The review that you spoke about with potentially combining the Pennsylvania and Ohio entities in the respective states, and Just wondering if you could walk us through in a bit more detail what would be kind of the gives and takes of why or why not do that as you think about process going forward and why is the review happening now as opposed to any point in the past as well? Just kind of curious on your thought process and what the drivers could be there.

Speaker 2

Well, thanks for your question. Through our EFI Forward program, we have aligned our operations into a 5 state operating model and We're finding efficiency gains there already even though it's early in the process and we're very excited by that. We're reviewing the legal entity and financial consolidation, because we believe the time is right To stand the team up and do a very thorough review of the opportunity, we have fielded calls Over the last several years in my experience on would there be an opportunity here And given our comprehensive review of the organization opportunities, we thought now is the right time to get a project team stood up and underway. And while it's early, the team is really going to be charged with assessing the benefits for the company through Any kind of consolidation, but then we also have to keep our customers in mind and what type of benefits they may see from any action that we take here. The potential benefits, Jeremy, to me are the potential for increased efficiencies In some of our administrative functions and there is also a possibility that it could provide us better access to capital markets.

Speaker 2

So that's really our view of it.

Speaker 6

Got it. So it doesn't seem like there's anything out there that would Prevent you or dissuade you at this point as long as everything unfolds is what you expect in the review process. Is that kind of a fair way to think about it?

Speaker 2

Well, I think the team is charged with probably a critical cost benefit analysis. And once we're completed with that, We're going to do what makes sense here for our customers and for our company. And if it makes sense to us, we'll move ahead And we'll keep you updated on our progress.

Speaker 6

Got it. Thanks for that. Just pivoting here, I want To hit on some of these accounting changes that you're going through at your distribution companies, could you just refresh us, walk us through Process that led you to these changes and how we should be thinking about impacts going forward here, is everything kind of set At this point, as far as what levels of changes there are?

Speaker 3

Yes. Hey, Jeremy, this is John. First of all, let me apologize in advance for My voice, I've been under the weather this week and my voice is a little off. But to answer your question, there's really 2 primary accounting changes. 1 was Corporate support costs that we had historically capitalized based on a methodology, as we went through the FERC audit, They had maybe a different point of view.

Speaker 3

And so we came to a conclusion that Some of the corporate costs that we had historically capitalized going forward wouldn't get that level of capitalization going forward. And then the second accounting change was around Vedge Management, where we had historically capitalized a portion of our Vedge Management program And through various state audits and the FERC audit, we decided to move forward with having all that Flow through the P and L. So on average, it's about $150,000,000 a year That historically had been capitalized that now flow through the P and L. That is baked into our plan for the full year of 2022 and going forward.

Speaker 6

Got it. Sounds good. I'll leave it there. Thank you.

Speaker 2

Thank you.

Operator

Our next question is from the line of Julien Dumoulin Smith with Bank of America. Please proceed with your question.

Speaker 5

Hey, good morning, team. Thank you for the time. So maybe just a high level, how did the April rating agency conversations go? How are you thinking about the prospects

Speaker 2

Julian, thanks for the question. As John had mentioned in his prepared remarks, We had 3, what I would characterize as very good meetings in April to discuss our continued information and our ongoing efforts to improve our balance sheet. I think in all three cases, there was an acknowledgment Of the progress that we are making as a company and executing on what our plan was for the last year to 18 months. And it's also clear to me that we have to continue that track record of executing our business plan. So our focus, as we've said many times, is to get to the FFO to debt Goal of 13% no later than 2024.

Speaker 2

And I think that's well received as well as thereafter Getting into the mid teens level, we also had a dialogue on the use of proceeds for the 2 transformative transactions that we executed on in the Q4. And I think we are taking those steps needed to get to investment grade. And as we have stated before, that's very important for us and It is a very key focus for us moving ahead. John Taylor, I don't know if you have anything to add to that perhaps.

Speaker 3

Steve, I think you said it well. I thought the meetings were very productive. A lot of discussion around culture and the things that we're doing around our Code of conduct and other policies, as well as our financial plan. As you know, Julian, 2 of them have us on positive outlook. And I think as long as we continue to execute, I'm optimistic that they're going to be in a position to upgrade us sometime this year.

Speaker 3

It might be later this year, but as long as we continue to execute against our plan, I'm optimistic that they'll be able to do something Later this year. Now for S and P, they have us on a stable outlook. They have a little bit of a different timeline. But from the conversations that we had, I do anticipate that they could be in a position to at least have an outlook change Maybe as early as the Q4.

Speaker 5

Excellent. Great. And just a couple more detailed ones here, if I can. I mean, on the pension, What does that currently look like given the moves that we've seen in rates just even since threethirty one? Can you quantify the potential earnings impact?

Speaker 5

And then also on the accounting change, was there any amount that was raised to the amounts you capitalized? What was that amount and in what jurisdiction?

Speaker 3

Yes. So Julian, on the pension, let me just maybe level set the group here on. Obviously, there's a lot of moving pieces, But there's been some volatility in the interest rate environment as well as the equity markets. And on the balance sheet side of things, It's been positive, right? It's moved our funded status from 82% at the end of last year to 84%, which is About a $350,000,000 improvement in the liability, which improves credit metrics by about 20 basis points.

Speaker 3

However, for pension expense, because of the planned losses versus the expected return, That's going to put some pressure on or at least some potential pressure on pension expense. And if you had to market at the end of March, It would have been about a $0.10 per share headwind for us. Now a couple of thoughts I would offer. First of all, we have 8 months to go In terms of setting pension expense for next year, so it's early and we have time to recover. But more importantly, the management team is already planning as if this headwind is going to exist and we'll be able to use the O and M benefits associated with our Epi Board program that we recently announced has offsets as well as we're looking at other opportunities Around the timing of maintenance activities, we're looking at our debt financing plan, including voluntary pension contributions and many more opportunities.

Speaker 3

So Bottom line is we wanted to be transparent and more importantly articulate our plan that we're working on. Obviously, this is something that We're going to continue to monitor, but we run our business conservatively and always have levers that we can pull to offset items such as this.

Speaker 2

Julian, this is Steve. I would just also add, we have seen volatility surrounding pension performance in our past. We have demonstrated in our past that we can overcome headwinds. And also, I would add that It is our ongoing effort to be transparent about key issues like this and it's early in the year. As John said, we have 8 months And the team is dedicated to defeat any headwinds that we will see.

Speaker 2

So I'm very confident in that. And once again, we'll keep you updated throughout the year as we proceed. Julian, I'm sorry. You had a 2 part question. Maybe you could just move around

Operator

a second.

Speaker 5

Sorry, on the accounting changes, just what was in rate base, if How is that moving around? Sorry, just super quick clarification.

Speaker 3

Yes. So all the accounting changes, Julien, were prospective. So Okay. It impacts the historical rate base. So it was a prospective change.

Speaker 5

Excellent. Thank you, guys. Appreciate the patience.

Speaker 2

Thank you very much, Julien.

Speaker 7

Thank you.

Operator

Our next question is from the line of Steve Fleishman with Wolfe Research. Please proceed with your questions.

Speaker 8

Yes, great. Thanks. I think you answered my question on the pension. It sounds like that's just manageable within the 6% to 8% Growth rate, is that fair?

Speaker 2

Yes. Yes, absolutely.

Speaker 8

And maybe any thoughts on you obviously were very successful with the transmission Sell down. Any thoughts on whether it might make sense for additional asset sales? I guess you don't really have any further equity needs except the $100,000,000 a year thing. So I'm just curious any thoughts there?

Speaker 3

Yes. Hey Steve, this is John. So you're right, we don't have any additional equity needs in our plan. Obviously, we feel like we have the right level of growth and cash flow to get back to investment grade and fund our capital programs and take a competitive dividend. Having said that, I think if you look at the track record of this management team, we're going to do what's right for shareholders.

Speaker 3

And if there was ever an opportunity or need like that again in the future, we would absolutely look at all of our options and capitalize on the difference between Public and private market valuations, just like we did last year.

Speaker 8

Okay, great. And just any, I guess further update on the shareholder settlement Process, I think after got a little noisy with that one judge, just how confident are you that that's going to get approved?

Speaker 2

Well, Steve, you're referring to the derivative lawsuit settlement. And just to let everyone Got it. All parties in the shareholder derivative cases agreed to a global settlement. And as you know, it's subject to court approval. On March 11, the parties submitted There are papers to the Southern District, of Ohio Court.

Speaker 2

And the approval process will take a little bit of time. And I just want to continue to respect that ongoing process and that's where we stand on it.

Speaker 8

Okay, great. Thank you.

Speaker 2

Thanks, Steve.

Operator

Our next question is from the line of Angie Storozynski with Seaport Global. Please proceed with your questions.

Speaker 9

Thank you. Just following on the investigations, can you give us an update what's going on with the SEC investigation?

Speaker 2

Sure, Angie. Thanks for your question. The investigation is ongoing and We as a company continue to fully cooperate and we're ready to do that. I can't really speculate And any timing for completion right now, we're somewhat on their timetable and we respect that. So I don't want to get too far ahead of the process.

Speaker 2

And that's really where we stand with it right now.

Speaker 9

And you haven't provisioned, So there's no reserve or any provision for that potential settlement or fine, whatever you call it?

Speaker 2

No. We've noted in our 10 Q that we believe that it's probable that we'll incur a loss, but we Can't reasonably estimate it at this time.

Speaker 9

Okay. And then secondly, John, you mentioned that The O and M is tracking your annual plan. It's a little bit surprising to me to see maintenance outage expense For power plants during the Q1, which is the peak usage season For power, is it just it's basically that's when the outage happens and hence the recognition of the cost?

Speaker 3

Yes. The outage was in late February, March. So March being kind of a shoulder month, I don't feel like that's Unusual at all.

Speaker 9

Okay. And then lastly, I think that you guys mentioned that there's Another grid mod CapEx filing in Ohio, is that something new? Because I actually didn't expect any Regulatory proceedings besides just the pending audits in Ohio this year?

Speaker 3

No, that's Angie, that's something that we've had on our radar for quite some time. We started the GRID Mod 1 program 3 years ago, and it was always the intention that there would be different phases of the grid mod program. And so that's something that we'll file probably later this year or we will file later this year. We've already kind Had some discussions with some of the intervening parties around the plan and some of the thoughts, But it'll be kind of a continuation of our GRIN mod 1 program, smart maters, distribution automation, voltage regulation. We might do some pilot work around trip savers and utility owned storage, Battery on storage, those types of programs, but this has always been in the plan.

Speaker 9

Okay. And then last one, where do you expect to be on the FFO to that by the end of this year?

Speaker 3

So from an S and P perspective, we'll be over 11%. And from a Moody's perspective, we'll be somewhere between 10.5%, 11%. So It's kind of where we're targeting. A lot of it's going to depend on what we do with the final $800,000,000 Of the proceeds, whether we fund the pension or take out additional holding company debt. So those numbers could change quite a bit, but that's current.

Speaker 3

Thank you.

Speaker 9

Great. Thank you.

Speaker 2

Thanks, Angie.

Operator

Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.

Speaker 4

Hey, everybody. Thank you for taking my question. Just curious, can you remind us ex the accounting changes, What was embedded in 2022 guidance for O and M growth or O and M savings rate year over year?

Speaker 3

Yes. So Michael, if you adjust last year though and there for the accounting changes, Just our base level operating costs, we're going to be at about $1,400,000,000 this year. Last year, we were a little bit north of that number. So as you start to think through the rest of this year, Especially in the second half of this year, you will start to see So, some O and M reductions relative to the prior year based on our FE4 program. And then that will continue into the following years.

Speaker 3

So we're super excited about it and its meaningful reductions And you'll start to see that in the second half of this year. And that's going to give us some flexibility to do some things Strategically, where if we want to put some additional O and M in certain jurisdictions or do some other things, it just gives us a lot of flexibility When you have that type of program.

Speaker 4

Got it. And when I

Operator

go ahead.

Speaker 2

Sorry, Michael. This is Steve. I was just going to add, Even while you're going to see that impact on O and M, which will be a lowering impact, we're keeping our customers at the center of the equation here also and that is even as we lower O and M by the reinvestment in certain ways In our various computer systems, the ability to streamline service to customers, the customer experience will be enhanced all at Same time. So I just wanted to add that. Sorry, I stepped on you there.

Speaker 4

All good. Just one follow-up though. When I think about the long term, Did the long term kind of whatever O and M assumption is embedded in guidance, does that include the benefit you may realize from the utility consolidations in

Speaker 3

Well, so Michael, so the benefit associated With the consolidation of Pennsylvania and Ohio, that's not necessarily an O and M benefit. There might be some administrative things that are streamlined, but in the main, it's not an O and M benefit because as Steve mentioned, we've already gone to a 5 state operating model operationally, Right. And so we're already operating like that. And that's where some of the benefits on the O and M side is the streamlining of the operations Into that 5 state operating model. The benefits associated with consolidating some of the legal entities Is on the financing side, right?

Speaker 3

I mean, right now, those companies, smaller companies and they're accessing the private Debt markets and they're a little bit more expensive than if you were to access the public markets.

Speaker 4

Got it. Okay. And then finally, just coming to one of the regulatory items, the light vehicle charging program in New Jersey that you're Kind of trying to reach settlement 4. Can you remind us what's the capital required in that?

Speaker 3

So I think we're going to be it's going to be south of $100,000,000 I think it's going to be probably somewhere around $50,000,000 That will be rate based. But yes, we're working the settlement and hopefully we'll have some clarity around that soon.

Speaker 4

Got it. Thank you, John. Thanks, Steve. Much appreciated, guys.

Speaker 2

Thank you, Michael.

Operator

Our next question is from the line of Shunjari Banerjee with Barclays. Please proceed with your questions.

Speaker 7

Hi, good morning guys. Thanks taking the question. Maybe a couple of ones. So you mentioned OpCo recapitalization. Could you remind us which OpCos you would Specifically target, and just how much of the proceeds from the disposal you would allocate there?

Speaker 7

And then secondly, around the $800,000,000 that could be used for pension contribution or HoldCo debt, are you leaning Towards one or the other right now, would Moody's prefer you to allocate it more towards HoldCo debt reduction and could that accelerate the upgrade to investment grade? Thanks. Yes. Great.

Speaker 3

Thanks. Yes. So when it comes to The equity contributions into the operating companies, that's primarily going to be in our Pennsylvania companies In Mon Power, in West Virginia, maybe a little bit in Ohio, But primarily Pennsylvania and West Virginia, and then like I said, just a little bit in Ohio. So that's kind of what we're targeting right now. A lot of those cap structures over the years have moved down to the mid-40s.

Speaker 3

We're going to get those back up to 50%. So We feel good about that plan. When it comes to the $800,000,000 obviously, a lot of it depends on the interest rate environment, We're the funded status of the pension plan is incremental capital opportunities. Our focus is on improving the balance sheet, Enhancing our credit metrics, but also to make sure anything we do is accretive to earnings. The conversations that we had with Moody's specifically, I didn't get the sense that they pension contribution versus whole code that take out.

Speaker 3

I don't think they it counts as adjusted debt to them anyway in both. And so I didn't think they had a view one way or the other. But We're obviously as we kind of make these decisions, we'll run things by them.

Speaker 7

Thank you very much. And just one very quick follow-up. When you had the conversations with the agencies, Did you get a sense that they were looking for anything else outside of the sale of the FPT minority stake? So sort of conclusion of any of the investigations, like the SEC ones, just curious there.

Speaker 3

No, I didn't get that sense. I mean, like I said, I think for us, it's just a matter of executing our plan And deploying the proceeds from the Brookfield transaction. And I think they're very, very pleased with the changes that we've made. They're very interested Our cultural changes and the things that we're doing around our compliance program And stuff like that. So I didn't get the sense from them that there was anything else that they were looking for.

Speaker 3

But I don't want to speak for them. I just don't recall that in conversation being a big issue.

Speaker 6

Perfect. Thank you very much.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Paul Friedman with Mizuho. Please proceed with your questions.

Speaker 9

Thanks.

Speaker 10

Does the debt pay down at the HoldCo and potential recapitalization of utilities in any way change your equity guidance for the next 5 years? And if not, should we just expect that capital spending Will ultimately be funded all with debt?

Speaker 3

So Paul, let me maybe address your question there. I mean, if you think about Our $17,000,000,000 capital program and the equity proceeds that we have coming in, Plus the cash from operations that we'll generate over the 5 year period. We're only going to fund our capital program at 30% debt, $5,000,000,000 In the meantime, we're going to take out $1,500,000,000 So over the forecast period, Our balance sheet debt is only going to grow by $3,500,000,000 even though we're going to invest 17,000,000,000

Speaker 10

And does that include expected funding, additional funding at the holding company?

Speaker 3

So we won't I mean, so the plan right now Is the holding company debt after we take out the $500,000,000 This year, we'll be at $6,500,000,000 So it will not we will not have any more holding company debt. In fact, if we make a decision that we're going to take out more holding company that it will be less than that.

Speaker 10

Okay. And then, I guess you're talking about possible pension funding. Have you Determined on a target number for pension funding this year?

Speaker 3

It would be voluntary. It's a voluntary Contributions, so, there's no required

Speaker 9

I guess

Speaker 10

it's been like around $500,000,000 Is that Sort of a reasonable assumption that that would continue?

Speaker 3

So the remaining proceeds, Paul, is $800,000,000 from The 2 transactions and if we decide to make a pension contribution, that's totally up to us. So It could be the full $800,000,000 it could be we decided to go a different route and maybe take out additional holding company debt. Maybe we fund the pension $300,000,000 or $400,000,000 There's a lot to be worked out. And so I can't give you a good answer, But it's a voluntary contribution, not a mandatory or required contribution.

Speaker 10

Great. That's it. Thank you very much.

Speaker 2

Thank you, Paul.

Operator

Our next question is from the line of Greg Orrill with UBS. Please proceed with your questions.

Speaker 11

Yes, thank you. I was wondering how you're thinking about the 50 basis point RTO adder. And I know you've disclosed sort of your sensitivities to that, but in sort of the Downside scenario, how does that affect your thoughts around earnings guidance?

Speaker 2

I don't think it's going to have a material impact on earnings guidance, Greg. I think we've been fairly clear that the on the sensitivity that we do have for it, It will not materially throw us off track in terms of achieving our goals. We also continue to believe that The adder is appropriate and it's helpful for us as we continue to build out And improve transmission reliability for our system in our 5 state footprint and that's where we stand on it.

Speaker 11

Got it. Thank you.

Speaker 2

Sure. Thank you.

Speaker 1

Thank you.

Operator

There are no further questions at this time. I would like to turn the floor over to Mr. Straw for closing remarks.

Speaker 2

Well, thank you very much and thanks for your ongoing support and attention today. I did want to just take a brief moment and wish everyone a very happy Earth Day, Which is today actually. At FirstEnergy, we're really proud of our commitment to the environment. This week, we Stated a goal in which we're going to plant 20,000 trees throughout our service territory. It's just one of a number of different Initiatives organized by our green teams, which are employee volunteers who support environmental initiatives In a full range of items from planting trees to beach cleanups to recycling.

Speaker 2

And I'm just very, very proud of our employees engaged in such an important activity for us. And I just wanted to acknowledge and thank them for that today. And with that, I'll call a close to the call. Thank you for your continued, attention and support, and we'll be talking to you soon. Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
FirstEnergy Q1 2022
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