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S&P 500   5,137.08
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South Korean doctors hold massive anti-government rally over medical school recruitment plan
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Nobel laureate Muhammad Yunus is granted bail in a Bangladesh graft case
The former chairman of the state-owned Bank of Beijing is being investigated for alleged corruption
Critical asset just had biggest fall on record (Ad)
Trader Joe's chicken soup dumplings recalled for possibly containing permanent marker plastic
Chicago 'mansion' tax to fund homeless services stuck in legal limbo while on the ballot
Critical asset just had biggest fall on record (Ad)
What to watch for as China's major political meeting of the year gets underway
Head Start preschools aim to fight poverty, but their teachers struggle to make ends meet
S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
South Korean doctors hold massive anti-government rally over medical school recruitment plan
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Nobel laureate Muhammad Yunus is granted bail in a Bangladesh graft case
The former chairman of the state-owned Bank of Beijing is being investigated for alleged corruption
Critical asset just had biggest fall on record (Ad)
Trader Joe's chicken soup dumplings recalled for possibly containing permanent marker plastic
Chicago 'mansion' tax to fund homeless services stuck in legal limbo while on the ballot
Critical asset just had biggest fall on record (Ad)
What to watch for as China's major political meeting of the year gets underway
Head Start preschools aim to fight poverty, but their teachers struggle to make ends meet
S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
South Korean doctors hold massive anti-government rally over medical school recruitment plan
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Nobel laureate Muhammad Yunus is granted bail in a Bangladesh graft case
The former chairman of the state-owned Bank of Beijing is being investigated for alleged corruption
Critical asset just had biggest fall on record (Ad)
Trader Joe's chicken soup dumplings recalled for possibly containing permanent marker plastic
Chicago 'mansion' tax to fund homeless services stuck in legal limbo while on the ballot
Critical asset just had biggest fall on record (Ad)
What to watch for as China's major political meeting of the year gets underway
Head Start preschools aim to fight poverty, but their teachers struggle to make ends meet

FirstEnergy Q2 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Irene M. Prezelj
    Vice President, Investor Relations
  • Steven E. Strah
    President and Chief Executive Officer
  • K. Jon Taylor
    Senior Vice President, Chief Financial Officer and Strategy

Analysts

Presentation

Operator

Greetings and welcome to the FirstEnergy Corp Second 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. [Operator Instructions] As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host, Irene Prezelj, Vice President, Investor Relations for FirstEnergy Corp. Thank you Ms. Prezelj. You may begin.

Irene M. Prezelj
Vice President, Investor Relations at FirstEnergy

Thank you. Welcome to our second quarter 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.

We will also discuss certain non-GAAP financial measures, reconciliations between GAAP and non-GAAP financial measures. The presentation that supports todays discussion and other detailed information about the quarter and 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 Jon Taylor, our Senior Vice President and Chief Financial Officer. Several other executives will be available for the Q&A session.

Now I'll turn the call over to Steve.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thank you, Irene. And good morning, everyone. I'm glad you could join us today. Yesterday, we reported second quarter GAAP earnings of $0.33 per share and operating earnings of $0.53 per share at the upper end of our guidance range. Today, we are reaffirming our 2022 operating earnings guidance of $2.30 to $2.50 per share. We are also affirming our long-term annual operating earnings growth rate of 6% to 8% and accelerating our FFO to debt target of 13% by one year to 2023 from 2024 with targeted metrics in the mid teens thereafter.

As Jon will discuss later, given our strong year-to-date performance we have begun strategically investing in maintenance activities in our distribution businesses, to further improve reliability and get ahead of future planned work. This provides tremendous flexibility in our long-term plan. We will continue to accelerate these operating expenses during the second half based on the strong outlook for the remainder of the year.

Through the first half of 2022, we've made significant progress to strengthen our culture, optimize our operations, bolster our financial position and support the grid of the future, continuing our momentum to become a more customer focused and sustainable utility. Across the company, we're continuing to amplify our core values of safety, integrity, diversity, equity and inclusion, performance excellence and stewardship. We've recently launched a new employee communication campaign to focus on each of these values and how they drive our success.

In addition, I personally connected with thousands of employees over the past several months, to discuss our core values and to hear directly from them on what we can do to get better as a company. Since March, I've held about 50 virtual and in-person listening sessions with more than 4,000 employees across First Energy. We've had a lot of great engagement during these sessions and it's been incredibly valuable for me to interact with employees and get their feedback. I'm very proud of how our employees are executing on our plan and of the company and the culture we're creating together.

I'd also like to take a moment to welcome two new directors who were elected to the Board at our Annual Meeting in May. Sean Klimczak of Blackstone and Jana Croom of Kimball Electronics.. In related developments, John Somerhalder was elected Board Chair and no longer serves as an executive of the company. And Lisa Winston Hicks was elected Lead Independent Director. I welcome the guidance, leadership, and support from our refresh Board.

Now let's turn to some key accomplishments in the quarter. First, in May, we completed the sale of the 19.9% minority stake in FirstEnergy Transmission LLC to Brookfield for approximately $2.4 billion. The proceeds from this historic transaction together with the $1 billion Blackstone equity investment that closed in December have been deployed to strengthen our balance sheet and fund our regulated capital investments.

And as Jon will discuss in more detail later by paying down over $2.5 billion in long-term debt this year, we are driving meaningful progress and are ahead of our original plan to improve the credit profile of the company. Our transmission business continues to be one of the focal points of our strategy. Our Energizing the Future program has a relentless focus on reliability improvements for our customers. We began the investment program in the ATSI region in 2014 and since that time we have seen a 53% reduction in the interruptions to customers caused by transmission outages, up 49% decrease in transmission line outages and an 88% improvement of our protection systems.

We're striving to build on the success within ATSI and across our territory as we continue to expand this investment program. So far this year we've completed important work across our footprint to reconfigure several substations rebuild transmission lines replace transformers and enhance network, cyber and physical security. These projects improve operational flexibility, upgrade the condition of equipment and enhance system performance.

Our goals for the transmission business are aggressive yet achievable. And we have the right strategies in place to ensure our success. We're also making continued progress to advance our customer-focused sustainable growth strategies and the distribution side of our business.

In Ohio, earlier this month, we filed for the second phase of our grid monitorization program, which builds off the system upgrades we've completed in the state since the PUCO approved our Grid Mod I program in 2019. The new four-year Grid Mod II plan proposes a $626 million capital investment to expand our deployment of grid mod technologies designed to in the hands of delivery of safe, reliable power, promote modern experiences for customers, offering emerging technologies and provide opportunities to help lower customer bills.

The second phase of our grid mod program includes installing automated equipment and nearly 240 distribution circuits that can isolate problems, minimize the number of customers impacted by an outage and quickly restore electric service. Energy saving, voltage regulating equipment on nearly 220 circuits that can reduce the amount of energy that must be generated and more evenly distribute electricity down a power line. And an additional 700,000 smart meters along with the supporting communications infrastructure and data management systems.

In addition, the filing includes several pilot programs expected to provide enhanced customer benefits. These include supporting the adoption of EVs across our Ohio service territory by offering incentives to residential and commercial customers, who participate in utility manage charging of their electric vehicles. And installing a battery storage system along the Ohio Turnpike that's designed to support increased EV charging load and enhance grid reliability. In the aggregate, we estimate the benefits to our Ohio customers of enhanced reliability, energy efficiency opportunities and the innovative products and services to exceed the cost of the Grid Mod II program by nearly $280 million in today's dollars.

Moving to West Virginia in April, the Public Service Commission provided conditional approval of our requested tariff to build a total of 50 megawatts of utility-scale solar generation in the state at a cost of approximately $100 million. In their order, the PSC required our manpower and Potomac Edison subsidiaries to subscribe at least 85% of the output before beginning construction on the these facilities. We began accepting commitments from residential, commercial and industrial customers to purchase solar RECs in May. We're making progress to meet the 85% threshold and at that time manpower and Potomac Edison will seek final approval from the commission for a surcharge to cover the balance of the project costs and begin full scale construction. We expect the first solar generation site to be in service by the end of 2023, with the construction completed at the four other sites no later than the end of 2025.

Finally, in New Jersey, JCP&L reached a settlement on our electric vehicle program with BPU Staff New Jersey rate Council and others, which was approved by the BPU without modifications in June. Our four-year, $40 million EV driven program is designed to accelerate the adoption of light duty electric vehicles with incentives and rate structures that continue to support the development of EV charging infrastructure throughout our JCP&L service territory. The cost of the program will be deferred into a regulatory asset, capital costs will earn a return of 9.6% with recovery of those costs determined in JCP&L's next base rate case.

Before I pass the call over to Jon, we recognize there is significant interest in our pension plan performance in light of rising interest rates and the current bear market. We're committed to being transparent and flexible on this issue and we'll keep you informed on our expectations and our plan as the year progresses. In addition to the details Jon will provide on today's call, we've also published two new slides on this topic in our highlights document. I'm very pleased with our progress throughout the first half of this year. We remain committed to continuing our transformation and becoming an industry-leading utility that provides value to our investors, customers, employees and communities.

Now, I will turn the call over to Jon.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Thanks, Steve. And good morning, everyone. Thanks for being here. I'll start with an additional perspective on the pension, then we'll move into a discussion of our earnings and other financial matters. To put this all in context, the impact of the pandemic, the war in Ukraine and other macroeconomic factors has resulted in an extreme inflation and market volatility that we haven't seen in over 40 years. And so, we recognize that this is a topic that has a lot of attention today, but we don't consider this an issue that impacts the long-term value proposition of the company.

Through the first half of this year, interest rates have increased significantly with the discount rate that measures our pension obligation, increasing from 3% at the end of 2021 to approximately 4.8% as of the end of June. Likewise, equity markets across the globe are down significantly with asset performance in our pension trust down approximately 15% through June. Although this results in an estimated earnings headwind of approximately $0.30 per share beginning in 2023, which reduces the non-cash benefit from the pension from $0.40 per share in 2022 to an estimated $0.10 per share in 2023. The funded status of our qualified pension plan has improved from 82% at the end of 2021, to 84% at the end of June. Although, we believe the earnings impact associated with the pension will normalize over time, we recognize that the historic market environment presents a challenge in the near term from an earnings perspective.

And so, let me take a minute to address this. First, our regulated strategy and capital investment program continues to be strong, as we transition more of our capital investments to formula rates with real time returns, while working to lower our base operating expenses. Our base plan includes formula rate investments of approximately $2.4 billion in 2023 and $2.6 billion dollars in 2024 that earned solid returns.

In addition, as Steve mentioned, the outlook for 2022 is very strong, given the successful tender offer completed in June at our holding company and higher than anticipated income from legacy, commodity based investments. And our FE Forward program continues to be part of our plan, allowing us to optimize our cost structure and be more strategic with our operating costs. In combination, these items allow us to accelerate future planned maintenance work into 2022 that will provide flexibility with operating expenses in future years, while meeting our financial commitments for this year.

We've also identified a number of other steps to address the pension headwind. These include accelerating additional capital investments and optimizing our financing plans, which includes moving $1 billion of planned debt financings from 2023 to future years, reducing corporate costs in our real estate footprint as well as anticipated benefits from continued improvements we are seeing in customer arrears. From a regulatory perspective, we are exploring proposed changes to rate treatment for our pension to moderate impacts of market volatility between rate cases, but this will take some time and will likely be executed as we file base rate cases in each jurisdiction over the next few years.

And so, I'll conclude the pension discussion to say this, we realize this is complicated and recognize the potential near-term earnings impact to the company. But we do believe there is a clear silver lining. As markets became volatile and interest rates increased, we were able to take advantage of the situation by retiring high coupon debt and amounts well above our original plan. At the same time rising interest rates reduced our pension liability by $550 million.

And as a result, as Steve mentioned earlier, we made significant progress through the first half of this year to improve our balance sheet and strengthen the credit profile of First Energy. Utilizing the proceeds from the Brookfield and Blackstone transactions, we eliminated approximately $2.4 billion of HoldCo debt in the first six months of the year, which equates to $125 million in saved interest cost on an annual basis. This includes the early retirement of an $850 million FE Corp note in January, a $500 million FE Corp note in June and the repurchase of $1 billion in high coupon FE notes through our successful tender offer last month. This surpasses our original plan for holding company debt reduction and brings First Energy HoldCo debt as a percentage of total debt to 26% from 33% at the end of 2021.

And based on our current forecast with these enhancements, we are tracking just under 12% FFO to debt in 2022 and plan to be at 13% FFO to debt in 2023 a year ahead of what we initially targeted. Last week, Fitch upgraded First Energy and FET to investment grade and upgraded our utilities to a BBB flat rating reflecting the successful completion of our equity transactions, use of those proceeds to pay down company debt and we expect to strengthening of our credit metrics, our settlement to address key Ohio regulatory issues and are meaningful improvements on governance matters.

We are proud of the progress we made. And as we saw with the FET transaction, premium valuations of our businesses in the private sector give us significant optionality to further improve the balance sheet and increase value for shareholders.

And now, let's turn to a discussion of our financial performance for the quarter. Second quarter GAAP earnings were $0.33 per share and operating earnings were $0.53 per share and within the upper end of our earnings guidance range. The $0.20 of special items in the quarter included a charge of $0.17 per share associated with the redemption and early retirement of FE Corp notes that we discussed earlier.

On a pro forma basis, excluding the impact of accounting changes, rate credits provided to how customers and equity financing transactions, operating earnings increased by $0.06 per share or 13% compared to the second quarter of 2021. On a year-to-date basis, we reported GAAP earnings of $0.83 per share and operating earnings of $1.12 per share. Again, adjusting for the impacts of accounting policy changes Ohio rate credits and dilution, this represents a $0.06 improvement versus our operating earnings for the first half of 2021 or approximately 6% year-over-year growth.

Results for the quarter in our distribution business decreased slightly compared to the second quarter of 2021, but remain consistent with our expectations. The positive impact of our investment programs in Pennsylvania, Ohio and New Jersey was offset by slightly lower residential customer demand as I'll discuss in a moment, and higher planned operating expenses including planned maintenance outages at our generation facilities, as well as the impact of accelerated maintenance work we mentioned earlier.

I do want to note, despite the inflationary conditions, our year-to-date base O&M expenses are consistent with our operating plan, reflecting strong financial discipline. Total and weather-adjusted distribution deliveries increased approximately 1% compared to the second quarter of 2021 as a result of stronger demand from commercial and industrial customers, reflecting improving conditions versus last year.

Residential sales decreased 1.6% on a year-over-year basis due primarily to milder weather compared to the second quarter of 2021. On a weather-adjusted basis, residential usage decreased slightly due to a continued shift to more normal work and social activities albeit sales in this class continue to be elevated as compared to pre-pandemic levels. Deliveries to commercial customers increased 1.5% or 1.9% on a weather adjusted basis and sales to industrial customers increased 2.4% versus last year. And for the first time industrial sales were higher than pre-pandemic levels by close to 1% reflecting strong recovery and growth in many sectors including steel, fabricated metals, automotive and food manufacturing.

In our transmission business second quarter results benefited from strong rate base growth associated with our ongoing investments in the Energizing the Future program to improve reliability for our customers. We currently have more than 1,000 transmission projects underway across our footprint, and we've been successful working through acute supply chain challenges to remain on track with our plan, to invest $1.5 billion in our system this year.

And finally, in our corporate segment. Our results improved by $0.09 per share compared to the second quarter of 2021, largely impacted by higher profits from our legacy investment in a mining operation in Montana, as well as lower interest costs from our efforts around the balance sheet I mentioned earlier. The legacy investment is from the late 2000s where we are a minority investor with a 33% share in the facility. Historically, it has not been a significant driver of our results. However, given higher commodity prices, the mine is outperforming our expectations for 2022 with both earnings and cash distributions, which as I mentioned before, provides a significant flexibility to accelerate reliability and maintenance work in our distribution business.

Although, earnings from this investment may continue in the future years, our original plan did not include any earnings contribution, beyond 2022. We're off to a solid start for the first half of the year with a strong outlook for the second half. As Steve mentioned, we are confirming our 2022 operating earnings guidance range of $2.30 to $2.50 per share and are also providing third quarter earnings guidance of $0.70 to $0.80 per share. While we're disappointed in our relative stock price performance since our first quarter call, given the progress we have made over the last years on many fronts, we're confident that our superior assets and clear strategy place us on strong footing to perform well in the future.

With that, we'll go ahead and open the line for your questions. As always, thank you for your time and your interest in First Energy.


Questions and Answers

Operator

Thank you. [Operator Instructions] Our first questions come from the line of Shar Pourreza with Guggenheim Partners. Please proceed with your questions.

Shar Pourreza
Analyst at Guggenheim Partners

Hey, guys.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Good morning, Shar.

Shar Pourreza
Analyst at Guggenheim Partners

So, no surprise. I'm going to start with the pension question here, if I may. I guess what sort of proposed changes to rate treatment would you be exploring for your pension to sort of moderate the volatility in between cases? What could that look like, I mean have you started any dialogs with the commissions on this ahead of the filings? And then, just as a follow-up, would you consider moving away from them sort of that MTM accounting and towards maybe the smoothing of actual gains and losses, like some of your peers do whether that's the quarter method or some other approach? Thanks.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Hi, Shar. This is Jon. So, I think we've had some internal discussions about this. We have not talked to any of the regulatory commissions about this but it is something that we're looking at and we're trying to figure out mechanisms that can protect the company from the volatility that we're seeing today. And so nothing necessarily set in stone, but looking forward like tracking mechanisms or some type of deferral mechanism that could protect the utilities from the volatility that we're seeing.

And then, to your second question and when we adopted the mark-to-market accounting, I think back in the 2010-2011 timeframe, that was a preferred method of accounting, and so we can't go back to another method.

Shar Pourreza
Analyst at Guggenheim Partners

Got it. Okay. That's helpful, thank you for that. And then just lastly, I know obviously you reiterated the 6% to 8% growth rate and we clearly see the strategy you guys have laid out to try and mitigate the pension driven headwinds, but $0.30 drag is still somewhat material in the near term. Just all else equal, of the $0.30 ends up being the final number, I guess what would that kind of put you in terms of that 6% to 8% at least at the front end knowing some of these mitigation measures you could be deploying? Thanks.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Shar, before I turn it over to Jon for a couple of comments, I just wanted to, on an overall basis just acknowledge, it's a very fluid situation for us. We have put a plan together that Jon outlined in his prepared remarks and it's up to us to work it. We continue to be very clear and transparent in our disclosures and during the first quarter call, we were very upfront and straightforward about the challenge. We also have found a way to find a path forward and we're going to continue to be very transparent on the issue. There is some things within our plan that are within our control, some outside of our control. As I said it's fluid.

And look, we're going to be committed to do what's reasonable to address the gap, but be careful that we're not going to unduly impact our customers' experience with us and get our company off track. So, I just wanted to make those introductory comments before I turn it back over to Jon.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. And Shar, I'm not going to obviously commit to low end or high end of the 6% to 8%. But what I would tell you is this, it's a very volatile situation. In fact, if you just look through the month of July, given the broader markets are up, there's been some softening in the interest rates. The earnings headwind associated with the pension has improved. At the same time, our funded status has also improved. So, it's a very volatile environment and something that we're staying close to. I think -- let me maybe take a minute and talk about this in two ways.

First, if you just look at year-over-year earnings growth based on what we know relative to the pension, it starts with our regulatory strategy, strong formula rate investments across transmission and distribution as well as the rate structures we have in place from the Ohio SEET settlement that provides really strong regulatory earnings growth. Next year, you'll also start to see the full year of the interest savings from the HoldCo debt reduction initiatives, which is about $0.18 a share annually. That will start to flow through beginning next year. Obviously, that's going to be partially offset by new debt issuances, but it will be a benefit to year-over-year earnings.

And then as I mentioned, we have planned operating efficiencies from FE Forward as well as the benefits from the tender transaction and the investment earnings on the corporate side, the mining operation, were giving us flexibility to pull ahead some planned maintenance work this year from future years. And then the remainder of the issue will be addressed by optionality across a broad spectrum of initiatives, including increased capital investments on the transmission system, permanent reductions in corporate and support costs, for instance, external branding and communication costs as well as reducing our real estate footprint.

And then, we might even have uplift from the mining operation next year that we would consider that's not on our plan. So I say that because I think the most important way to maybe look at it is what's changed relative to our plan to deal with the $0.30 headwind? And I think you can kind of frame it this way. About 40% of the headwind will be addressed by the moves we're making now to move operating expenses around. 25% of the headwind will be addressed through changes in our financing plan. And then, the remaining third will be associated with the reductions in corporate costs and new capital investments that I mentioned earlier.

Shar Pourreza
Analyst at Guggenheim Partners

That's extremely good color, Jon, that's very much appreciated that one. I appreciate it guys. Thank you.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thanks, Shar.

Operator

Thank you. Our next questions come from the line of Steve Fleishman with Wolfe Research. Please proceed with your questions.

Steve Fleishman
Analyst at Wolfe Research

Yes. Thank you. Can you hear me okay, Steve?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Yes, we got you. Good morning.

Steve Fleishman
Analyst at Wolfe Research

Great. Thanks. So just to kind of follow-up to the answer that last question. Jon, you gave the buckets of kind of the offsets, but it kind of implied that those offsets might be enough to degree that $0.30, is the right number because I know that number won't be set in stone to offset at least maybe most of that. Is that correct? Or is that..

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. That's correct. I mean the items that we have in place around increasing our capital investments for reductions in corporate and support costs, customer arrears, the improvement in uncollectible expense that we're seeing, we feel very comfortable based on what we know right now, as well as the changes in the financing plan. Everything that I mentioned earlier, we feel good about the $0.30.

Steve Fleishman
Analyst at Wolfe Research

Okay. And then obviously, you'll flex these, if that $0.30 becomes smaller by year end, maybe you don't do as much but you're kind of finding ways to manage this issue so far?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Right. correct.

Steve Fleishman
Analyst at Wolfe Research

Okay. Good. And then Second question is the comment on the value of private market values relative to public market. Could you maybe give a little more color on why you kind of highlighted that in the slide deck and what you might be thinking there?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Steve, this is Steve. And it's really all around just considering the given success that we had with the FET transaction. And we're just going to continue to examine ways of creating shareholder value if it makes sense. Step one is to understand potential value. And it's something that we look at on very much a routine basis. And we do have the opportunity to create some new optionality, we believe, based on valuations and where those valuations are right now. And it's just part of our ongoing planning process.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes, Steve, I would just add on to that, that we continually look at various options to create value. And if there are ways to be opportunistic to take advantage of the difference between public valuations and private market valuations, we're going to consider that. And I would tell you that utility asset valuations in the private sector are -- continue to be strong.

Steve Fleishman
Analyst at Wolfe Research

Okay. And then, that's helpful. And then, my last question is just on the FFO-to-debt improvement kind of happening sooner. Could you talk to whether that has any kind of implications on the timing of -- you mentioned the Fitch going to investment grade, maybe the other agencies and also the timing of when you might consider growing the dividend again?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. So maybe I'll take the discussion with the rating agencies. We've provided them our new plan, which reflects the tender transaction, the changes that we've made in our financing plan as well as the mitigating actions that we're going to take to offset the pension. And it clearly shows that we're going to get to 13% next year as we execute. But I'm not going to speak for the rating agencies. It's up to us to execute against our plan. Moody's has us on positive outlook. But as we talked about with them, it's really important for us to execute against that plan to ensure that they feel comfortable with moving to an upgrade

And then, on the dividend, yes, I mean, obviously, we're focused on dividend growth. I mean we realize that it's been flat for a couple three years now. And so as earnings start to grow, we will continue to consider dividend growth.

Steve Fleishman
Analyst at Wolfe Research

Okay. Thank you.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thanks, Steve.

Operator

Thank you. Our next questions come from the line of Nicholas Campanella with Credit Suisse. Please proceed with your questions.

Nicholas Campanella
Analyst at Credit Suisse Group

Hey, thanks for taking the question. I appreciate it. I just wanted to ask again on the public versus private comments. You do have kind of a track record for doing this already at the FET level. So just curious if FET something similar to that transaction that you're exploring? Is this kind of like another entire portfolio review? Can you give us more details there, please?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes, Nick. So, we look at different options each and every year, just look at all the assets that we have. We're not necessarily targeting a set of assets at this point in time. But it is something that we take a look at from time to time. And if there's, like I said, options to create value for shareholders, that takes advantage of these high private valuations, then we're going to consider that.

Nicholas Campanella
Analyst at Credit Suisse Group

Got it. Thanks a lot. And then just back on the pension efforts here. You kind of mentioned working to kind of smooth these at the regulatory level. Just what states kind of have the most meaningful impact for like an ultimate offset? And is it really just like Ohio and then it would be a 2024 Ohio rate review item to watch or maybe you can give us more clarity there?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Well, I mean, I think you could probably -- based on the number of customers we serve and the size of the states, our service territory in those states, it probably mirrors that pretty good. So, I don't have the breakout by state, but we've been able to do some things in certain states, New Jersey, West Virginia and Maryland, where we've had recent rate cases, and we were able to get some different treatment there.

Ohio and Pennsylvania, it's been more traditional. In Ohio, we recover service cost only. Pennsylvania is based on cash contributions to the pension trust. So, the exposure probably you can just kind of pro rata it based on the number of customers each of those utilities have or each of those states have. But what we're really looking to do is try to protect the company from the volatility that we're seeing, for instance, this year. All right. Thank you.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thank you.

Operator

Thank you. Our next questions come from the line of Michael Lapides with Goldman Sachs. Please proceed with your questions.

Michael Lapides
Analyst at The Goldman Sachs Group

Hey, guys. Thank you for taking my questions. Couple of ones. First of all, I noticed in the back of the slide deck, you did not change your capital spend forecast. Some of the commentary you make about pulling forward spend is what you're saying you'll pull forward O&M into 2022? Or are you talking about pulling forward capital or both?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Right now, Michael, our plan calls for the pulling forward of O&M primarily.

Michael Lapides
Analyst at The Goldman Sachs Group

Okay. The other question is your regulatory section still highlight plans to file rate cases everywhere next year, except Ohio and Ohio in 2024. Do you -- are you filing those cases to fix rate design? Or are you filing those cases because you think you're under earning in all three of those states?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Well, I think if you look at the ROE that we published for New Jersey, West Virginia and Maryland, they're all sub-8% as of Q2 LTM. So, I would tell you that I feel like we're not earning a reasonable return at this point in time. So, I think there's nothing that I'm aware of that gets to rate structure or rate design at this point. I mean obviously, we have a little bit of time to plan and prepare for that. But this is mostly to earn a reasonable return on our investments.

Michael Lapides
Analyst at The Goldman Sachs Group

Got it. And can you remind me which of those states have forward-looking test years and which of those are more on a historical test year? And is there anything you can do to fix the ones or improve the rate making design for the ones that aren't historical?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. So West Virginia and Maryland, I think, are historical test years. So, we'll likely use 2022 as the test year. I think New Jersey is a little bit of a hybrid where you use some historical, but you can project for certain things and project into the future. So I don't think there's a lot that we can do to change that in those states, but that's kind of where we are at this point.

Michael Lapides
Analyst at The Goldman Sachs Group

And in Pennsylvania, are you under-earning even though you're utilizing the DISC or do you not have the DISC turned on?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

We have the DISC turned on -- all of our operating companies have the DISC turned on. So at least according to what we published, we were earning about 8.1% on a pro forma basis, which includes the full year of accounting changes that haven't flowed through the actual results yet, but will over time.

Michael Lapides
Analyst at The Goldman Sachs Group

Got it. Thank you, Jon. Thanks guys. Much appreciated.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thank you, Michael.

Operator

Thank you. Our next questions come from the line of Jeremy Tonet with J.P. Morgan. Please proceed with your questions.

Jeremy Tonet
Analyst at J.P. Morgan

Hi, good morning.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Good morning.

Jeremy Tonet
Analyst at J.P. Morgan

Just want to come back to the pension situation real quickly, if I could. Just to put a bow on at all. It sounds like you guys believe you have all the tools needed to fully offset the $0.30 headwind as it stands right now. Is that a fair way to think about it?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. Based on what we know today, Jeremy, we've identified everything we need to offset the $0.30 headwind. I would just remind you, just to -- it's going to be fluid, right? And so that's going to change from time to time, and we're just going to have to keep a close eye on it. And we'll be transparent with you on exactly where we are. But based on what we know as of this point in time, we feel like we can address the $0.30 headwind.

Jeremy Tonet
Analyst at J.P. Morgan

That's very helpful. Thank you for that. And then, just wanted to circle back to the management review process, if I could. Just wondering time line to conclusion there. When we hear more? Do we need a resolution of all actions in Federal core or just wondering what's the gating items to complete at this point?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Jeremy, as we previously disclosed, there was a management review committee created as part of our Board of Directors and the work is underway. So that sets off a 90-day clock to complete the review. And I would say I would be thinking around mid-September by the time it's completed. And the Board is following their process, and I really can't comment beyond that.

Jeremy Tonet
Analyst at J.P. Morgan

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

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Okay. Thank you.

Operator

Thank you. Our next question has come from the line of Julien Dumoulin-Smith with the Bank of America. Please proceed with your questions.

Julien Dumoulin-Smith
Analyst at Bank of America Merrill Lynch

Hey, guys. Sorry, a couple of clarifications here. Just to confirm, are you still guiding to the approximately 255 to 260 for '23, right? And I know you said this are fluid, but the '23 number specifically here.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

That's right.

Julien Dumoulin-Smith
Analyst at Bank of America Merrill Lynch

Got it. And when you say things are fluid, obviously, pension mark-to-market is fluid. Are the offset fluid? And just if you can repeat what elements are fluid? I mean I'd be curious, I mean, how do you think about the core contribution, PRB prices seem to be abating here. Also, I suppose, the Pennsylvania tax rate moving around, is that kind of more of a structural uplift here? Just if you could talk to the offsets being fluid and then some of the components there, those two?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

There is some ability to be flexible with some of the offsets in terms of how we accelerate expenses from future years into this year. The level of increased transmission spend that we want to put in place. The mining operation is somewhat fluid. So, there is some fluidness to all of this. My point on the pension was mostly around -- we know $0.30 today, it's gotten a little bit better as of last Friday. But the markets are volatile, right? And the $0.30 could be lower, it could be higher. And so, we're just going to have to keep an eye on it. But based on what we know today, we feel pretty good about where we are.

Julien Dumoulin-Smith
Analyst at Bank of America Merrill Lynch

Right. And so maybe just to clarify the fluidity of this. Because pension is fluid, you're moving costs around. How structural is that $0.30 offset though, right? I mean, maybe that's the other side of the stuff. I get that the Pennsylvania tax rate benefit could be structural or at least into the next rate case. But what are the dynamics here if you can think about that?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

So just real quickly because you mentioned it twice now. The Pennsylvania tax rate, that's not going to -- that's not structural. That's going to flow back to customers. So that won't be an earnings impact to us going forward. But a lot of the things that we're doing around corporate and support costs, reducing our real estate footprint, that is structural changes that we're going to make. The improvement in customer arrears and being able to reduce uncollectible expense, that could be structural. The level of contribution from the mining operation, that's probably fluid, right, because a lot of it depends on commodity prices and the ability for the mine to execute against their plan. So, there's a lot of moving pieces here.

Julien Dumoulin-Smith
Analyst at Bank of America Merrill Lynch

All right. Excellent. Well, thank you. I'll leave it there. I appreciate it.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thank you, Julien.

Operator

Thank you. Our next questions come from the line of David Arcaro with Morgan Stanley. Please proceed with your questions.

David Arcaro
Analyst at Morgan Stanley

Hi, thanks for taking my question. I was wondering if you could talk a little bit about the load growth that you're seeing, pretty good growth this quarter. And I'm wondering if there are any pockets of weakness or recession risks that you see coming up, particularly around the industrial sales or how things are shaping up from there?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. So, David, I would tell you that we're seeing pretty good growth in the industrial sector quarter-over-quarter. I mean if you look at the last three or four quarters, on average, it's growing anywhere from 2% to 3%. And that's what we're seeing in the second quarter. I would tell you, on the industrial side, the trends in many of the sectors are better than what we saw in the first quarter. For instance, steel was up 10% quarter-over-quarter versus 4% in Q1. Auto was up 7% versus 4% in Q1. So, we're seeing a lot of trends move in the right direction, which we feel good about. And in fact, as we mentioned on the prepared remarks, this is the first quarter we've seen since the pandemic that our industrial load was better than what we saw in 2019. And that was across a lot of different industries.

David Arcaro
Analyst at Morgan Stanley

Got it. Thanks for that color. And just one clarifying question on the pension. You had mentioned the $0.40 kind of benefit goes down to a $0.10 noncash benefit. I was wondering if you -- how do you look at that $0.10 pension benefit? Is that kind of transitory and goes away over time? I know it's going to fluctuate, obviously, in the near term with the pension and with the markets. But is the $0.10 kind of sensitive to rate cases going forward, does it get passed along? Thanks.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

So each jurisdiction has different rate treatments for customers. And so, in the states that we file -- we'll file in next year, that will use '22 as a test year. It will be at that $0.40 level. And so they won't see the change to the $0.10 a share next year.

David Arcaro
Analyst at Morgan Stanley

Okay. Understood. Thanks so much.

Operator

Thank you. Our next question has come from the line of Gregg Orrill with UBS. Please proceed with your questions.

Gregg Orrill
Analyst at UBS Group

Yes, thank you. Just a follow up on the O&M pull forward. Just sort of if you could address how you've thought about supply chain challenges and inflation and labor issues. Do you have the labor you need?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes, Gregg, I would say a lot of the work -- we've already started to execute on. And so, we have the contractors and the labor to support that. That's not to say that we don't have challenges with supply chain. We're seeing a lot of different impacts, specifically around lead times, around equipment, across a number of categories, transformers, breakers, regulators, all have extended lead times. But this is more around just getting planned maintenance work done ahead of schedule and in '22 as opposed to future years. So it's not necessarily a contract or a labor issue.

Gregg Orrill
Analyst at UBS Group

All right. Thanks.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thanks, Gregg.

Operator

Thank you. Our next questions come from the line of Srinjoy Banerjee with Barclays. Please proceed with your questions.

Srinjoy Banerjee
Analyst at Barclays Investment Bank

Hi, good morning, guys. Thanks for taking my question. So obviously, congratulations on the Fitch upgrade. For the other rating agencies, any specific catalysts you think they're waiting for? I think Moody's mentioned sort of the Board level management review is one. And to clarify, just the FFO-to-debt number you're giving 13%, does that add back pensions?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Well, they'll use the pension obligation at the end of '21, that's in their metrics, which supports the 13% that we provided them. That's correct. But with respect to catalyst, I'm not aware of anything specifically that either Moody's or S&P are looking for. I think it's just continued execution against our plan and seeing how the cultural changes continue to progress, the changes around compliance and ethics that we're executing on. All the recommendations that came out of the investigation and how we're executing on those will be important as well. But nothing specifically that they've said is a catalyst for the upgrade that I'm aware of.

Srinjoy Banerjee
Analyst at Barclays Investment Bank

Thank you. And just in terms of the use of proceeds from the various transactions, I think the total was around $3.5 billion, so both the FET minority stake sale and the new equity as well. You did mention $2.5 billion, of course, gone to HoldCo debt reduction. How are you thinking about the remaining $1 billion?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. It will be deployed at the operating company level to strengthen capital structures to fund their capital programs. So that's the plan.

Srinjoy Banerjee
Analyst at Barclays Investment Bank

Got it. And should we think of that as sort of accelerated debt repayment in any of those opcos or does it more just sort of reduce upcoming debt issuance needs there?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. The latter, upcoming debt issuances.

Srinjoy Banerjee
Analyst at Barclays Investment Bank

Got it. And then just one final one. You mentioned the potential for future asset sales or minority stake sales. How are you thinking about that in terms of what would drive the use of proceeds there?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Well, I would tell you, given where some of our high coupon debt is trading today, I mean, it's very attractive to maybe continue to further delever the holding company, if you could. But I think we'd cross that bridge when we got to it.

Srinjoy Banerjee
Analyst at Barclays Investment Bank

Thank you very much.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thank you.

Operator

Thank you. Our next question comes from the line of Sophie Karp with KeyBanc. Please proceed with your questions.

Sophie Karp
Analyst at KeyBanc

Hi, good morning. And thank you for taking my question.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Good morning, Sophie.

Sophie Karp
Analyst at KeyBanc

A quick question on the Montana mining, I guess, saturation, that you highlighted this quarter. You mentioned that it's not in the plan beyond 2022. Is that just simply not factoring in the contributions from there? Or are you planning to dispose of that asset or that investment?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. Sophie, just in our original plan that we announced back in November and February of this year, we didn't assume earnings contribution from the mine in '23 or beyond. We just had a modest amount factored in, in '22, and it's exceeding our expectations in this year.

Sophie Karp
Analyst at KeyBanc

So the plan is to continue to hold that investment?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Well, I would tell you, we've looked at exploring how we transition out of that facility over time. As you can imagine, it's a challenge to do something like that, just given the situation. But it is something that we look at from time to time, and we'll have discussions with the other owners.

Sophie Karp
Analyst at KeyBanc

Got it. Thank you for that color. And then on the Grid Mod, right, the Grid Mod plan, you filed in Ohio. Can you remind us the regulatory cadence of that? What should we be watching as far as dates and discussions with regulators with federal?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. So, I would say to be determined. I think the staff and the commission will need to set a schedule. And depending on how things go, that will drive the schedule. I can't give you a sense of the time line at this point in time.

Sophie Karp
Analyst at KeyBanc

Got it. And last if I may, not to kind of beat this dead horse with pension, but just maybe I missed the remarks. Absent of different regulatory treatment that you might get later on, right, when you pursue it. Is there a reason why you cannot smooth out the impact of pension volatility just strictly from the accounting standpoint?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

No. I mean, because your pension is -- the pension just -- if you just look at the pure accounting, I mean, you mark the pension -- everybody marks the pension to market and set pension expense based on the year-end market conditions. And so that's really what sets pension expense. And so if you look at just the interest component, you're seeing significant increases in interest rates. And then the assets are down 15%. And so that creates the volatility in the, what I'll call the normal pension exposure for us and, quite frankly, for other companies.

Sophie Karp
Analyst at KeyBanc

All right. Thank you.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thank you, Sophie.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Strah for any closing comments.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Well, great. Thank you very much. I just wanted to take a moment to thank everyone for joining us today and for your continued support, and we'll talk to you soon. Thank you.

Operator

[Operator Closing Remarks]

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