Irene Prezelj:

Thank you. Good morning, everyone, and welcome to FirstEnergy's second quarter 2024 earnings review. Our President and Chief Executive Officer, Brian Tierney, will lead our call today, and he will be joined by Jon Taylor, our Senior Vice President and Chief Financial Officer. Our earnings release, presentation slides and related financial information are available on our website at firstenergycorp.com. Today's discussion will include the use of non-GAAP financial measures and forward-looking statements. Factors that could cause our results to differ materially from these forward-looking statements can be found in our SEC filings. The appendix of today's presentation includes supplemental information along with the reconciliation of non-GAAP financial measures. Now, it's my pleasure to turn the call over to Brian.

Jon Taylor:

Thank you, Brian, and good morning, everyone. I also want to extend my sincere gratitude and best wishes to Chris and Irene. They have been great to work with over the years and have always been there for me and the employees of the company. I wish them every bit of happiness in their retirement. Today, I'll review our financial performance, discuss economic and customer trends and provide an update on our regulatory and financial initiatives. Let's start by reviewing the larger special items that impacted our second quarter GAAP results. These include increased asset retirement obligations recognized in connection with the planned transfer of a legacy impoundment site to a third-party and the impact from the new EPA legacy coal combustion residuals rule. Costs associated with redeeming high-cost debt using the proceeds from the FET transaction, charges connected to the anticipated resolution of the OOCIC and SEC investigations, partially offset by the receipt of insurance proceeds associated with the shareholder derivative lawsuit settlement and regulatory charges resulting from a commitment in the Ohio ESP V order. We continue to see strong execution on our Energize365 capital investment program, solid financial discipline and a culture of continuous improvement. And because of that, we delivered second quarter operating earnings of $0.56 per share, which is above the midpoint of our guidance and compares to $0.47 per share for the second quarter of 2023. The results primarily reflect new base rates in our integrated business, strong invested capital across all of our businesses and formula rate investment programs and significantly higher year-over-year customer demand. Looking at our segment results for the quarter, in our distribution business, operating earnings were $0.22 per share compared to $0.24 per share in the second quarter of last year. This reflects planned increases in operating expenses we discussed previously, partially offset by higher customer demand and rate base growth rate investment programs and a lower customer rate credit in Ohio as part of our 2021 earnings test settlement. In our Integrated segment, operating earnings were $0.21 per share versus $0.12 per share in the second quarter of last year. Results primarily reflect new base rates in Maryland, West Virginia and New Jersey that went into effect over the past 8 months. Rate base growth in distribution and transmission formula rate investment programs and the impact of higher customer demand, partially offset by a higher effective tax rate. Operating earnings in our stand-alone transmission segment were $0.14 per share compared to $0.18 per share in the second quarter of 2023. Year-over-year rate base increased more than 10% as a result of our transmission investment program, but this was offset by the dilution from the 30% interest sale of FirstEnergy Transmission LLC to Brookfield, which closed in March of this year. Finally, in our Corporate, segment losses were $0.01 per share versus $0.07 per share in the second quarter of 2023. This improvement is the result of ongoing lower financing costs from the redemption high-cost debt. More detail on our second quarter and year-to-date results can be found in the strategic and financial highlights document we posted to our IR website yesterday afternoon. Looking ahead, we are providing guidance of $0.85 $0.95 per share for the third quarter, which reflects the continued impacts of new base rates in our integrated business, continued rate base growth and higher customer demand, partially offset by a lower planned earnings contribution from Signal Peak. And as Brian mentioned earlier, we are reaffirming our 2024 guidance of $2.61 to $2.81 per share as well our long-term 6% to 8% annual operating earnings growth rate. In his remarks, Brian shared a look at the trends related to data center growth in our service territory. I want to expand on that by taking a quick look at some of the broader economic and load activity in our region. Recent trends over the past year are positive in our region, including GDP that has averaged just over 2% for the past year, and employment growth of just under 1.5% over the past 12 months. And from a customer demand perspective, we're seeing positive weather-adjusted customer demand of 1% over the last 12 months, primarily resulting from increases of 1.3% in the commercial and 1.1% in the industrial customer classes with demand in the auto and services sectors, up 14% and 7%, respectively. And so we believe we're in a great position to serve our customers and our investment program will adjust as needed to ensure capacity and reliable service. From a financing plan perspective, earlier this month, we received the remaining $1.2 billion in proceeds from the $3.5 billion, 30% FET interest sale to Brookfield. You'll recall that we received the initial proceeds of $2.3 billion when the transaction closed in March, the remaining $1.2 billion in interest-bearing notes that were extinguished with Brookfield's final payment on July 17. We're deploying those proceeds in a credit accretive manner, consistent with our plan to further transform our balance sheet and support our Energize365 grid investment program. As we've discussed, the sale completes a series of transactions over the last two and half years that resulted in nearly $7 billion in equity capital at an equivalent share price of $87 a share or 36 times trailing PE multiple. In total, these proceeds were used for over $3 billion in high-cost debt reductions at FE Corp, including the remaining $460 million of the 2031 bonds in the second quarter, nearly $2 billion in utility long-term debt redemptions and $2 billion to pay off short-term debt that would have otherwise been financed with long-term debt at our utilities. Following the closing of this transaction in March, our corporate credit rating was upgraded by Moody's and S&P, restoring it to investment grade at all three rating agencies. The credit ratings at our subsidiaries were also upgraded and this momentum continued last week as S&P further upgraded FET and its subsidiaries. Going forward, our focus is on continued execution of our plan, achieving cross-supportive regulatory outcomes, moving past legacy issues and financing our robust investment plan in a credit-supportive manner, consistent with a BBB flat credit profile. Additionally, earlier this month, we launched a request for proposal for a second pension lift-out transaction to eliminate the remaining $700 million in non-regulated pension liability. This transaction is successful would eliminate all non-regulated pension liability, further reduce pension volatility and improve the quality of earnings of the company. Recall that in December of last year, we executed the first pension lift-out transaction, removing approximately $720 million of pension liability at $0.95 on the dollar. Turning now to recent regulatory activity. In Ohio, we filed our base rate review on May 31, request was for a $94 million rate adjustment on rate base of $4.3 billion, a 10.8% proposed on equity and a 55% equity capitalization ratio based on a 2024 test year. The rate adjustment supports recovery investments in the distribution system and customer experience enhancements, while keeping rates affordable for customers. The case includes recovery of investments in Riders DCR and AMI, which includes the Grid Mod I capital investments in base rates and resetting those riders to zero. It also includes a request to change the recovery of pension costs from service cost only to total pension costs, including previously incurred actuarial losses as well as a request for pension tracking mechanism to avoid volatility in the future. And it includes recovery of other costs previously incurred, including the major storm restoration costs and a program to convert street lights LEDs. Today, the Ohio companies will file an update to the base rate case review filing with an updated rate request. The update is necessary to include the impacts addressed in the May 15 ESP V order and to update 2024 test year financial information through May 31st to reflect actual operating results. Our initial request represents an estimated overall bill impact for typical residential customers ranging from a rate decrease of 1.3% in Toledo Edison to a 3.5% increase in CEI or an average increase of 1.4% across Ohio. Also in Ohio, on May 15th, the PUCO issued an order approving our ESP V with modifications, which became effective June 1st. The order extended Rider DCR through the conclusion of the base rate case, but excluded certain investments from recovery in Rider DCR. The order also provided for recovery of vegetation management expenses for the first two years the ESP and prospective deferral of major storm expenses. While we appreciate the support for key terms of our ESP V in the near-term, the order did not provide clarity regarding these key terms of the ESP for entire five-year period. With many directed to the base rate case for resolution. We subsequently filed an application for rehearing seeking greater certainty regarding key terms as well as proposed modifications, which included shortening the ESP V term to three years, providing full recovery of investments in the DCR through the conclusion of the base rate case and other proposals that preserve the economic value of the order for customers. Earlier this month, the PUCO granted the applications for rehearing filed by all parties for the purposes of further consideration. This step gives the PUCO more time to make its final decision, there’s no statutory deadline for the decision. The summer hearings were held in our Ohio Grid Mod II settlement, and we anticipate an order during the fourth quarter. In Pennsylvania, earlier this month, we filed the third phase of our long-term infrastructure improvement plan known as LTIP III, which is part of our Energize365 investment program. LTIP III includes a total projected investments of $1.6 billion over five years, building on the projects completed in LTIP I and LTIP II, the third phase of the program supplements reliability investments and includes both grid modernization and system resiliency projects. This includes targeted investments to accelerate infrastructure improvements and help enhance service reliability for more than two million customers in the state, while remaining focused on affordability. Investments are recovered through a distribution system improvement charge, or DISC based on actual capital structure and the benchmark ROE, which is currently 9.8%. The cumulative average residential customer rate impact recovered through DISC is $2.88 or a 2% increase. Pending PUCO approval, we expect capital deployment to begin in the first quarter of 2025 with DISC revenues estimated to begin in the second quarter of 2026. Also in Pennsylvania, in mid-August, hearings will begin in our base rate review filed in April. As we discussed on quarter's call, this is a request for a $502 million rate adjustment on rate base of $7.2 billion, with an 11.3% proposed return on equity and a 53.8% equity capitalization ratio. The review built on our service liability enhancements in Pennsylvania with additional investments in a smart, modern electric grid and customer-focused programs, while keeping rates comparable to other utilities in the state. Key components include implementing a 10-year enhanced vegetation management program to reduce tree-caused outages, reduced outage restoration time and reduce future maintenance costs; recovery of costs associated with major storms, COVID-19 and LED street light conversions; changing pension recovery from average cash contributions to traditional pension expense, including previously recognized actuarial losses. The review also includes a blended federal statutory tax rate of approximately 27%, but also continues to provide customer savings from previous legislative changes to federal and state tax rates. Additionally, the application proposes a pension OPEB normalization mechanism to track and defer differences between actual and test year expense to reduce volatility from the pension. And as Brian mentioned, we are engaging with the intervening parties in an effort to reach settlement prior to the scheduled hearings in mid-August. Finally, in addition to the settlement discussions on our Energize New Jersey infrastructure improvement proposal, we are also engaged in settlement discussions for our New Jersey Energy Efficiency and Conservation Plan. This plan, which was filed with the BPU in December 2023, covers the period from January 1st, 2025, through June 30th, 2027, with a proposed budget of approximately $964 million. It consists of a portfolio of programs addressing energy efficiency, peak demand reduction, and building decarbonization with recovery of lost revenues and provides a return on the investments. The BPU suspended the procedural schedule July 1st in light of these settlement discussions. A final BPU decision and order is required no later than October 15th of this year. So, we're making good progress in 2024, we're executing well. We have a strong strategy and opportunities to continue our positive momentum and growth. Thank you for your time today, and I'll open the call to your questions.

Shar Pourreza:

Hey guys. Good morning.

Shar Pourreza:

Good morning Brian. Just a couple of quick ones here. Brian, just on the growth numbers out there, obviously, you're highlighting the opportunities around data centers and kind of large energy-intensive consumers, you have transmission capacity to take on the load, but you still have this kind of 1% load growth figure out there. A lot of your peers have been raising expectations, some are quantifying the impact. I guess, what's holding back? And how and when are you thinking about updating investors around potential upside there? Thanks.

Shar Pourreza :

Okay. Perfect. And then lastly and maybe somewhat related. It's been noise around sort of co-located nuclear data center deals in PJM. I mean some of your current states like in Pennsylvania and Ohio could see similar deals like we saw with Susquehanna and AWS. I guess, why haven't you filed at FERC around the Susquehanna ISA docket when most of your peers have? And what's stance on the current complaint out there? Thanks.

Shar Pourreza :

Got it, Brian. And just a quick follow-up on that. Are you referring to potentially owning a certain amount of peaking assets and rates? Is that what the discussions are?

Shar Pourreza :

Okay. Perfect. Fantastic. Guys, we will see you soon. Thank you again.

Operator:

Our next question comes from Steve Fleishman with Wolfe Research. Please proceed with your question.

Brian Tierney:

So thanks for that, Steve. Those talks are in early discussions. And it's we would always like to reach a settlement and present that to the commission, but I'd say early stages at this point, and we're optimistic that we'll be able to get something done hopefully before the hearings in August.

Brian Tierney:

Here's what happened, the commission punted some key aspects of ESP V to the base rate case. And so it's hard for us to accept a five-year plan when there's uncertainty beyond the current rate case. And so if we were to time those things up a little better, and get more certainty on it, it's easier for us to accept an ESP V over a five-year term with more certainty. It's really hard for us to know what's going to happen to certain of those items that got punted after we get resolution of the base rate case.

Brian Tierney:

Yes. That's correct.

Paul Patterson:

Yeah. So thank you for that, Steve. Look, we've worked very, very hard to take responsibility for what happened in the past, make any payment and penalties that we need to move on beyond that. The thing that was very positive this quarter was in three of those issues, we made some real significant progress. First, there was the filing by the US Attorney's Office for the Southern District of Ohio recognizing that the three-year term of the DPA had ended and that we've been fully compliant with the requirements during that term. Second, we were able to make progress on the OOCIC and we were able to take a reserve for the amount that we think will be required to put that behind us. And then third, we were able to make progress achieving an agreement in principle subject to commission approval with the SEC. So across all fronts, we're making real progress on putting those legacy issues behind us and focusing on future. And I think, it's being well received in all of those venues.

Brian Tierney:

Thank you, Steve.

Jeremy Tonet:

Hi, good morning.

Jeremy Tonet:

Just wanted to follow up a little bit more on some of the earlier points on power prices here. And given the rise in both capacity and energy prices, just wondering, how you think about this impacts customers build headroom there. And just, do you see any potential efforts out there to kind of curb this? Could you share any thoughts on potential for state legislation to support new generation, state to form a strategic reserve, multiple VIUs coming together for a larger consolidated IRP, greater FRR use? Or just in general, do you see anything happening to stem higher prices?

Jeremy Tonet:

Got it. That's clear. competitive generation been there, done that. Just wanted to pivot a bit here, a smaller question. Just wondering, if you could speak to the size of cost savings that you guys are expecting with some of the facility optimization moves you're making, shrinking, changing location, just where those initiatives stand today? And what can we expect for timing impact of that and other kind of cost saving initiatives on radar?

Jeremy Tonet:

Got it. That's very helpful. I forgot to mention with my earlier question, as far as offshore wind is concerned, is that anything that on your radar at all or really just kind of the transmission side? I just wanted to check on that.

Jeremy Tonet:

Understood. Appreciate it. Thank you.

Operator:

Our next question comes from Nick Campanella with Barclays. Please proceed with your question.

Brian Tierney:

Look, thank you for the question, Nick. Look, I think it's interesting. I'd call yesterday's print, the canary in the coal mine and the canary didn't make it. If you look at what's happened with the IPP prices over the course of the year, they are all anticipating higher prices in the years going forward. If you look at the amount of new generation that cleared in the auction yesterday, according to PJM's auction report, it was like 100 megawatts, so essentially nil. Same in the auction prior to that, it was about 300 megawatts, again, not the right amount. If people were to respond to yesterday's print and say, yes, I think it's a good idea to invest in baseload dispatchable generation PJM, it would be six years before that capacity would come online. The reality is that we can increase load and build data centers almost immediately and it takes years of planning, permitting and procuring and construction to build a power plant. So I think it's indicative of the future, but it certainly doesn't solve the problem. So what we're going to do is what we need to do is enable the energy transmission you need a robust grid to be able to do that. PJM keeps opening these open windows. There's a current one open that we will be submitting proposals to. We just had significant action that we won in the last one, and we'll continue to do that. And we're going to engage in the discussion constructively with our states, regulators and customers to see if there's a way that we could deploy our balance sheet capacity for generation that looked regulated like to us and our investors. But that's how we're viewing the lay of the land right now. I don't have the silver bullet. That's the solution that will solve this tomorrow or in two years or in three years, but we're engaged in that discussion. I just don't think the PJM construct is going to fix the issue even if it sends some positive price signals.

Jon Taylor:

Hey, Nick, this is Jon. So we'll work through that as we do our long-term plan and update the investment community and spring time or winter time of next year. I would tell you, listen, we got to balance a couple of different things. We want to be at a BBB flat credit rating with rating agencies were not there yet. If you look at where their thresholds are versus where our planned targets are, we do have some balance sheet capacity, I would say 4% of the CapEx program is probably in right neighborhood. But there's going to be a lot of puts and takes as we think about the capital plan over the next five to 10 years that we'll have to consider. Is it base capital that you'll have regulatory lag? Or is it formula rate transmission capital, those are all things that are going to go into the mix. But we do have some balance sheet capacity, but I would probably peg it at less than 5% of the CapEx program.

Brian Tierney:

Thanks, Nick.

Carly Davenport:

Hey, good morning. Thanks so much for taking my question. Just like to quickly go back to the load growth piece. Strong prints across both commercial and residential customer classes this quarter. Could you just talk a little bit about what's driving that and kind of how you see that evolving going forward?

Carly Davenport:

Great. Appreciate that. I'll leave it there. Thank you.

Operator:

Next question comes from Michael Lonegan with Evercore ISI. Please proceed with your question.

Brian Tierney:

Michael, it's always our desire to reach a settlement in any of these rate cases. This one is something that I think is very much at its early stages. We'll be filing our update to the rate case filing later today. And then, of course, we'll be engaging with interveners and other interested parties as we work our way through the balance of 2024 and well into 2025. So yes, always want to reach a settlement, always open to that and always striving to do that in any case that we find.

Brian Tierney:

Yes. So thank you for that as well, Mike. Look, I have the belief that a well-run and growing utility should be going in for regular rate cases. We have a strong balance sheet. We have Energize365, the CapEx plant we're pursuing. By the way, we have a significant amount of our capital is covered under riders and trackers. But I think a very regular interaction with our regulators is something that we should be doing regularly. So I think in most jurisdictions, we should be going in every two to three years at the max and updating rates clearing out trackers and riders, getting them reflected in base rates and then moving forward with those again. So I just think it's a hallmark of a growing utility that you should be regularly engaging with your regulators.

Brian Tierney:

Thank you, Michael.

Paul Patterson:

Hey, good morning.

Paul Patterson:

I wanted to echo what Steve's -- congratulations to Irene first of all. A lot of my questions have been answered, but just sort of back to the -- sort of regulated or sort of central procurement ideas that you were throwing out there. I'm just wondering what jurisdictions in your distribution-only service territories do you think are more receptive to that that idea than others? Sometimes those logical issues would have you, I mean, for whatever reason, some might be as logical as something might be some might be a little bit more resistant or a little bit more receptive than others. I was just thinking any thoughts about in your discussion about who might be a little bit more open to that idea?

Paul Patterson:

Great. Thanks a lot. Have a great one.

Operator:

Our next question is from Andrew Weisel with Scotiabank. Please proceed with your question.

Brian Tierney:

Thank you for that. I'll pass that on.

Jon Taylor :

Yes. Andrew, this is Jon. So we've made significant improvements in the metrics just -- if you look at where we are as of the trailing 6/30 numbers, close to 200 basis points of improvement, a lot of that is coming from higher FFO. But if you just look at our debt levels, they're about $2 billion below where they were this time last year. I do think we're going to be a little bit challenged this year to hit the 14%. A lot of that is because of the SEC and OOCIC accrual. If you were to back those out, we would be closer to the 14%. But longer term, we're going to be at 14% to 15%.

Jon Taylor :

It would be next year. So sometime like in probably the first, second or third quarters of next year on a trailing basis, we would probably get to that 14% level.

Jon Taylor :

Well, it would be funded through the pension plan. It would be non-cash to the company, but the pension plan would have to fund it, which would use the investments that it has on hand to fund that.

Jon Taylor :

No, no, no, that's right. If you think about what we did in December, eliminated a $720 million liability by paying $0.95 on the dollar through the pension plan. So, no external financing to the company.

Jon Taylor :

Thank you, Andrew.

Gregg Orrill :

Yes. Thank you and thank you, Irene. I appreciate it. Just a couple of timing questions. Just on the potential construct of a NYSERDA type agency. What is the earliest do you think something like that could get started in any of your states? And then just on Grid Mod II, I know you've got the partial settlement there. What's your thinking on sort of the timing to get that done? What has to be done there?

Gregg Orrill:

Thank you.

Operator:

Our next question is from Anthony Crowdell with Mizuho Securities. Please proceed with your question.

Brian Tierney:

I don't think so, Anthony, obviously, we have capacity to use still. I think we're still serving capacity. We're still adding load. We still have transmission capacity to serve people. I think long term, it could be a problem for economic development and load growth, and I think that's why we need to solve it. So it's not happening now. It could happen going forward. And I think on a regional and statewide basis, that's why we need to think about this. We can't cede our competitiveness to other regions because we don't have the energy to serve them. And it's our job to make sure that doesn't happen.

Brian Tierney:

Thank you, Anthony.

Operator:

[Operator Instructions] Our first question is coming from Shar Pourreza from Guggenheim Partners.

Brian Tierney:

So let me start with the second one. The dialogue with data centers is really positive. We've been out to see Josh Snowhorn, and his team out of Quantum Loophole right outside of Frederick, Maryland, it's amazing what they have going on there. It's kind of fascinating to see. We have 2 230 kV lines that end in an open field where there used to be an aluminum smelter and now Josh and his team were building that huge data center complex. So we're in direct dialogue with them. They will be one of our biggest customers over time and look forward to continuing that dialogue.

K. Taylor:

Shar, that's a really good question. I think it's something that we will take a look at over time. Our tariffs are set up or such that some of these customers would be transmission-related customers. So the revenue uplift to the distribution companies wouldn't be as significant as you would see maybe in a residential customer, and that's by design. So it is something that I think over time we'll take a look at as well as I'm sure other utilities will take a look at. But at this point in time, we don't have anything that we're planning for.

Brian Tierney:

I don't think so, Shar. Thanks for the question. There are 2 new things that we raised in that OOCIC disclosure. One was at the beginning of the disclosure, we talked about -- we have traditionally talked about there being nothing that we were aware of that was outside of the DPA.

Michael Sullivan:

Maybe just -- I know you're about to file this year and I appreciate all the kind of upfront detail on Ohio. But maybe if you could just give a little more on how you are able to keep the rate hike request so low in Ohio after being out for so long?

K. Taylor:

Yes, Michael, I'll expand just a little bit. If you think about rider DCR, that's been in place for over 10 years now and we've been able to earn on pretty much all of our investments in the distribution system over those 10 years. And to give you a sense of magnitude, that rider alone is close to $400 million annually. And then if you look at the Grid Mod rider, that probably got kicked off a few years ago with our Grid Mod I implementation, it's close to $100 million.

Michael Sullivan:

Okay. That's super helpful. Just a quick follow-up on that. With respect to the riders, does the outcome here in the next month in ESP V and how riders are treated there have any impact on how you approach the base rate case filing?

Michael Sullivan:

Okay. Makes sense. And last one for me, Jon. Just the -- congrats on getting back to IG and just what are we thinking for timing and prospects for maybe even mid-BBB, sounds like you have the metrics to support it. Is it doable at both agencies and potential timing there?

Operator:

Next question is coming from Jeremy Tonet from JPMorgan.

Brian Tierney:

Thank you for that question, Jeremy. It's progressing really well. So we've added Toby Thomas as the Chief Operating Officer; Wade Smith, as the head of FE Utilities; and we just announced John Combs coming in. And these folks are hitting the ground running, making an impact right away.

Jeremy Tonet:

Got it. That's helpful. Good to see that there. And maybe following up on putting the dollars to work with regards to the Energize365 CapEx plan. Could you walk through the clean energy part a little bit more within the overall plan? And just wondering how that breaks down between solar energy efficiency, EV infrastructure, energy storage, different initiatives and how you see the timeline for that unfolding? And where could that go over time, I guess?

Jeremy Tonet:

Got it. That's very helpful. And just one last one, if I could, regarding Signal Peak and recognize it's a shrinking part of the plan over time here. But I think there's just been some reports out there about BLM delays and how that impacts operations down the line there, whether it has to shut at a certain time. Just wondering any thoughts you could share with us there?

Operator:

Your next question today is coming from Carly Davenport from Goldman Sachs.

K. Taylor:

Well, if we're able to successfully get the pension tracking mechanism, that goes a long way in deferring the volatility on to the balance sheet because essentially, you would be tracking to your test year expense and any changes from that point forward, both positive or negative to that would be deferred on the balance sheet. So the volatility would be significantly reduced if you're able to achieve some of those pension tracking mechanisms.

Carly Davenport:

Got it. Great. That's super helpful. And then maybe just as you think about the balance sheet, are there any factors that we should be thinking about that could push the receipt of those remaining FET proceeds beyond the latter part of this year?

Operator:

Next question today is coming from David Arcaro from Morgan Stanley.

K. Taylor:

David, no, this will be a more traditional base rate case. I mean, obviously, we have the DCR in place, which really covers most of all of the capital in the Ohio companies, specifically targeting distribution reliability enhancements. So we'll have the Grid Mod program as well. So no new capital programs in this particular proceeding.

Brian Tierney:

Yes. So it's a great question, Dave. It's -- I'll just say this, it's a little lumpy. So as these things are coming about, we're seeing things like the PJM Open Window 3, right? That was somewhat of an unanticipated opportunity that we don't have opportunities like that in our $26 billion plan. But as they come about, they'll be incremental to that plan. And so we've seen that process play out last year. I anticipate that we'll see more processes through future open windows from PJM as they're looking to build capacity on the grid to enable the type of load growth that data centers represent.

David Arcaro:

Got it. And I guess on that, just a quick follow-up. In your conversations with these data center customers, do you have a sense of the timing of when these are coming in and trying to connect to the grid when we could see a bigger increase in the load in interconnections coming?

Operator:

Your next question today is coming from Gregg Orrill from UBS.

Brian Tierney:

Yes. So our anticipation is that the accounts that we're recovering in the DCR should be fully recovered in either ESP V or the base rates. And there's been some discussion about that in the staff's filing and our responses. The accounts have been fully recovered for the last 12 or so years in the ESP V, and they've been audited and deemed appropriate and approved on an annual basis.

Operator:

Your next question is coming from Anthony Crowdell from Mizuho.

K. Taylor:

Anthony, it's Jon. I think that's late July. It's not June. So it's late July. I think it's like the 20th or 22nd. And if we could make a filing prior to that, we'd like to be able to do that as well. Anthony, just meaning not wait until the absolute terminal date. If we've done everything we need to, to allow us to file sooner than that, we will.

Brian Tierney:

No. There's what we talked about earlier. There's the DPA, there's the securities case and then there are the audit cases in front of the Ohio Commission, which we asked if they could proceed currently and hopefully get those behind us as well.

K. Taylor:

Yes. So not meaningful interest savings, but with the Moody's upgrade, we had an interest rate step-up because we were sub-investment-grade. Now that's been eliminated, effective with the upgrade, although it will start with the next interest payment later this year. I think on an annual basis, that's less than $10 million. But nonetheless, I mean, it's meaningful. And then I think we also got some better pricing on the revolving credit facility by about 25 basis points.

Paul Patterson:

Just a follow-up, I think it might have been Jeremy's question on Signal Peak. There's discussion about maybe being forced to shut down in 2025. Any thoughts there about how we should think about that? And if that happens, is it just a $0.12 maybe not being there? Or is there a potential for a negative EPS impact or something like that?

Paul Patterson:

Okay. Awesome. And then with respect to the Grid Mod settlement, is there any potential for having additional parties sign on to that? Or are we just going to go through what, I guess, has been outlined in the procedural [indiscernible] of the hearing examiners, are we pretty much just going to go down that road, do you think?

Paul Patterson:

Okay. Great. And then this has been a topic that's been coming up a lot in policy circles about trying to get more grid-enhancing technologies to be deployed as opposed to the substantial build-out and all the issues that are being seen with that in terms of cost and timing and stuff. I'm just wondering how do you think about grid-enhancing technologies, and do you have any thoughts about how they might be deployed at FirstEnergy or industry-wide?

Brian Tierney:

I don't see it as being strategically disruptive for our industry. These new technologies, it's -- I think it's best to take a crawl-walk-run approach. And you've seen that in other places in the industry, Paul, not as big of a deal for us, but things like carbon capture and sequestration, right, to do it at a plant level, I don't think has been done on a commercial scale in this country with a coal-fired power plant.

Operator:

Next question is coming from Angie Storozynski from Seaport Global.

Agnieszka Storozynski:

And then changing topics on interest rates. So we're starting to hear from some of the utilities that they were counting on some tailwinds from interest rates in the back half of the year. I mean that might still happen. But just wondering how do you see your growth plans and your financing plans and especially from an EPS perspective, if we -- if this current interest rate environment were to persist beyond this year?

Operator:

We reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

Irene Prezelj:

Thank you. Good morning everyone and welcome to FirstEnergy’s fourth quarter 2023 earnings review. Our President and Chief Executive Officer, Brian Tierney, will lead our call today and he will be joined by Jon Taylor, our Senior Vice President and Chief Financial Officer. Our earnings release, presentation slides, and related financial information are available on our website at firstenergycorp.com and we plan to file our Form 10-K next week. Today’s session will include the use of non-GAAP financial measures and forward-looking statements. Factors that could cause our results to differ materially from these statements can be found in our SEC filings. The appendix of today’s presentation includes supplemental information, along with the reconciliation of non-GAAP financial measures. Now, it’s my pleasure to turn the call over to Brian.

Jon Taylor:

Thank you, Brian, and good morning, everyone. I'm also very proud of our performance in 2023, and I'm excited to turn a new page in our company's history. Today, I'll briefly review our 2023 results, but more importantly, discuss our enhanced five-year plan and 2024 guidance. Our results in 2023 speak to our employees' dedication and tremendous performance, which included strategic and transformational initiatives, while doing the hard work to meet our financial commitments in a very challenging year and emerge as a stronger, more nimble company. Since I've been at the company, I can't recall a more challenging year in terms of the financial headwinds we faced including the most abnormal weather conditions that I can remember, the extremely volatile interest rate environment and a significant impact on our pension plan from the interest rate and equity market performance in 2022. But at the same time, our employees demonstrated their grid and resiliency to overcome these adversities while making strategic advancements to improve our operational and financial performance. Fourth quarter operating earnings were $0.62 a share, which is above the midpoint of our guidance. This compares to 2022 fourth quarter operating earnings of $0.50 a share. For the year, operating earnings were $2.56 a year, also above the midpoint of our guidance range. This represents 7% growth of 2022's guidance midpoint and compares favorably to operating earnings of $2.41 a share in 2022. Fourth quarter and full year results are detailed in the strategic and financial highlights document we posted to our IR website last night. As we pointed to throughout the year, we largely offset the headwinds I mentioned earlier through a strong focus on reduced operating expenses across each of our business units. The deployment of proceeds from the low-cost convertible debt offering in the spring and certain tax benefits realized in the third quarter. Our focus on operating expenses across the company resulted in a 14% or over $200 million reduction year-over-year, representing a $0.32 per share year-over-year benefit. As we've discussed, about 50% of that represents unique items or work that was accelerated in 2022 from 2023, the other 50%, which largely includes productivity improvements across the company, lower contractor usage, and reduced corporate spending on areas such as branding and advertising are sustainable reductions to our cost structure. Our 2023 results benefited from our formulary investment programs across our transmission and distribution businesses, which resulted in a $0.20 per share improvement year-over-year. As Brian mentioned, we successfully deployed $3.7 billion of capital in 2023, about $300 million or close to 10% above our original capital investment plan for the year. In our transmission business, earnings increased $0.08 a share or close to 10% for the year, primarily from our investment programs, which resulted in rate base growth of 9% compared to 2022. Formula rate investments in our transmission business were $1.8 billion, an increase of 28% compared to 2022 and $100 million or 6% above our original plan due to emergent projects. In our distribution business, earnings declined year-over-year, primarily from the lower weather-related distribution sales and the lower pension credit I spoke of earlier, but also reflect the impact of our formula rate investment programs, new rates that went into effect in Maryland in mid-October, higher weather-adjusted demand, and lower operating costs that I spoke of. Distribution CapEx of $1.9 billion represents an increase of 5% compared to 2022, and exceeded our original plan by $220 million or 13% as part of our planned increases we announced last year. Finally, in our Corporate segment, 2023 results benefited from lower O&M and a consolidated effective tax rate of about 16% versus nearly 21% in 2022, mostly as a result of planned use of state net operating loss carryforwards. And a final point on 2023, as Brian discussed, we executed a $700 million pension lift-out in December, representing about 8% of our total pension liability associated with our former generation subsidiaries. Removing this obligation from our balance sheet at a 5% discount will reduce future earnings volatility related to fluctuations in pension assets and liabilities and lowers overall pension plan costs. We will continue pursuing opportunities to further derisk the pension plan through additional lift-outs and pursuing pension tracking mechanisms through the regulatory process. Now, let's shift gears and talk about our outlook going forward. We are very pleased to introduce our five-year financial plan supporting our commitments to our investors, including 6% to 8% long-term annual operating earnings growth with significantly improved earnings quality, investment-grade credit metrics, and dividend growth in line with earnings growth. The cornerstone of this plan is a robust Energized 365 grid evolution investment plan of $26 billion, with approximately 75% of planned investments in formula rate programs that provide real-time returns. The plan includes increasing annual investments in our transmission and distribution system each year, resulting in 9% average annual rate base growth. Energize 365 supersedes our long-standing Energizing the Future transmission program, which we're sunsetting after a decade of strong performance. Our planned targets investments that improve the customer experience and supports the energy transition or new load requirements, while ensuring a fair and reasonable regulated return for our investors. The capital program is 45% weighted in FERC-regulated transmission investments in our stand-alone transmission and integrated businesses, and includes investments to enhance and upgrade the transmission system, add operational flexibility to support projects like New Jersey offshore wind and new data center load and regulatory required projects. On the distribution system, the plan includes investments by our distribution and integrated segments to improve the customer experience through reliability enhancements, grid modernization and clean energy investments such as smart meter deployment, distribution automation and energy efficiency programs. This comprehensive five-year instrument plan is very solid with flexibility to adjust as projects and programs emerge. Over the next couple of years, we anticipate an increase in earnings from our formula rate investment programs and as we rerate base distribution rates for over $19 billion of state regulated rate base. Our plan builds off the approved or settled base rate cases in Maryland, West Virginia and New Jersey, our integrated segment, representing $7 billion in rate base that was earnings 400 basis points below the allowed returns, as well as scheduled base rate cases in Pennsylvania and Ohio later this year, where we have $12 billion in projected rate base in our distribution segment. It is also forecasted to be under earning. The true-up of returns will allow us to earn closer to our allowed regulated returns and to significantly improve the earnings quality of the company with the expected declines in the earnings contribution from Signal Peak. In longer term, annual rate base growth with planned investments in formula rate programs, more timely recovery of base capital investments and cost discipline with our operating expenses will result in less regulatory lag than we've seen historically with modest and reasonable customer bill impacts. We expect our utilities to maintain their strong affordability position and keep rates at/or below our in-state peers. Energize 365 will be funded with cash from operations, which we expect to average $4 billion-plus annually, building off our 2024 cash flow projections, as well as regulated long-term debt issuances and a portion of the $3.5 billion in proceeds from the FET transaction. And our plan does not include any incremental equity needs beyond our existing employee equity programs and it supports FFO to debt of 14% to 15% and FE Corp debt at/or below 20% of total debt. Our 2024 guidance range of $2.61 to $2.81 a share represents a 7% increase off the midpoint of our 2023 guidance, which will largely be back-end loaded given the timing of new rates in West Virginia and New Jersey and O&M mark plan for Q1 of this year. With this in mind, our projection for the first quarter are operating earnings of $0.48 a share to $0.58 a share. To give you some color on the year-over-year increase, our midpoint of $2.71 a share reflects 12% consolidated regulated growth offset by a decline in Signal Peak's earnings contribution. The increase reflects new rates and investments largely from approved or settled base rate cases in our integrated segment, where we anticipate new rates for our West Virginia and New Jersey settlements to be implemented late in the first quarter and ongoing formula rate investments in each of our businesses. A return to normal weather-related customer demand, higher operating expenses reflecting the timing of O&M activities that I spoke of earlier, and new depreciation rates on our fossil generating facilities as part of the settlement we reached in West Virginia. It's important to note that our 2024 planned O&M is $140 million or 10% below 2022 levels. And when you adjust for timing such as planned generation outages, our O&M is $100 million or 6% below 2022, reflecting permanent cost reductions. Other drivers include improved earnings quality from the lower earnings contribution from our Signal Peak mining asset and a higher effective tax rate. The dilution from the FET transaction is largely offset by lower interest expense, representing planned debt retirements and interest income from the vendor take-back note as part of the FET transaction. Our $4.3 billion capital investment plan for this year represents a 16% increase compared to 2023. And is largely funded with $4 billion in cash from operations, which has improved year-over-year from several unique items that occurred in 2023, such as the $750 million pension contribution, contract termination costs and severance and employee separation costs, as well as increases from growth and cost recovery in our regulated businesses and improved working capital. With the improvement in cash flow, closing on our FET minority interest sale and deployment of those proceeds, we're targeting 14% to 15% FFO to debt by year-end. 2023 was a challenging but remarkable year, a year of significant transition, innovation and improvement with outstanding operational and financial execution from our 12,000 employees. Today, our company is a much stronger position, and we have a comprehensive plan for continued growth. Thank you for your time today. But before we go to Q&A, I'll turn the call back over to Brian.

Operator:

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Shar Pourreza with Guggenheim Partners. Please proceed with your question.

Brian Tierney:

Good morning, Shar.

Brian Tierney:

Shar, it's going to be really linear. We're not going to see much volatility. We're getting back to where a normal utility should look like. We're going to be investing in our regulated properties. And obviously, a lot of that recovery is going to come through formula-based rates. So that is -- tends to be linear, about 75% through formula-based rates. And then we're going to be regularly going in for rate cases. And it's just the normal cadence of how a utility operates. You invest, you operate, you recover and you finance. And that's the cadence that we're going to be on.

Brian Tierney:

Yes. I think we have enough cushion for sure. And we're seeing things like the PJM Open Window 3 that we responded to, where the team worked really hard to put together a solution in a short period of time, and we were able to garner over $800 million of incremental investment through that opportunity. I see more of those coming. They're not in our capital plan yet, and they won't be until we win the projects. But there's significant amounts of new CapEx that's not in our plan that I anticipate will see coming down, and we'll be able to fund that through a combination of cash flow from operations, debt equity issuances and things like the $3.5 billion of equity that's going to come into our system in 2024 from the transaction. So we're ready to fund these incremental CapEx, the way a traditional utility would without having to see much access for equity from the equity capital markets.

Brian Tierney:

No, no. I would just reiterate kind of what you said. I mean had we not done the transactions over the course of the last couple of years, raising $7 billion of equity capital, really at the equivalent of a 36 times PE multiple, we wouldn't be in this position today. I think a lot of it depends on formula rate CapEx versus base capital. I think if you look at some of our utility capital structures, they have equity layers that are a little bit better than our targeted equity capital structure. So we have some flexibility in the plan.

Brian Tierney:

Yes. No surprises at all, Shar. Status quo, they ask questions, we answer them, and nothing new with regards to the company from what was disclosed in the deferred prosecution agreement.

Brian Tierney:

Thanks, Shar.

Gregg Orrill:

Yes. Thanks. Congratulations on rolling out the new plan.

Gregg Orrill:

So, just on cash from operations guidance. Is the guidance that the new base for growth is $4 billion and you grow off of that? Or it that's the average over the plan and there's sort of -- it's down and then you're above that level toward the end of the plan?

Gregg Orrill :

Okay. Maybe just a follow-up for Brian. How do you sort of reconcile the idea of coming forward with the new plan that adds such a significant amount of new capital to the prior plan?

Gregg Orrill :

Okay. Thanks a lot. Appreciate it.

Operator:

Our next question is from Nicholas Campanella with Barclays. Please proceed with your question.

Brian Tierney:

Yes. So we think the increases will be in the single-digit for most of the time for the five-year period. If you look Nicholas, at Page 23 in the fact book that we put out there in New Jersey through West Virginia and Maryland, our rates are 22% to 30% below our in-state peers. And in Ohio, they're -- and in Pennsylvania, they're 3% to 7% below our in-state peers. A lot of that in New Jersey, West Virginia, Maryland represents opportunities to invest in the rate base and improve the customer experience. But also more importantly, if you look at things like customer affordability between 1997 and 2022, our customers' electricity share of wallet has decreased to 1.3% from 1.6%. So, when we talk to smart people who cover our industry and they say that you need to start getting concerned when you're at 4% to 5% share of your customers' wallet, we're nowhere near that. And electricity, whether it's for home heating, whether it's to power your vehicles or whatever, still represents a considerable value for the customers in the states we serve.

Nicholas Campanella:

Got it. That's helpful. And then I guess just kind of a similar question on what's embedded in the plan here. And I'm just thinking about earned ROEs, obviously, New Jersey is pretty low here, that will improve with the settlement. How do we think about kind of Ohio? And if you get an improvement versus your slides here, is that baked into the plan or just how should we kind of think about that?

Nicholas Campanella:

Okay. And then just one last one, just on the load growth, 1% embedded in the plan. Places at PJM have just continued to see demand revisions higher and I'm just wondering if that's conservative at all?

Nicholas Campanella:

All right. Thanks a lot. Have a great day.

Operator:

Our next question is from Michael Sullivan with Wolfe Research. Please proceed with your question.

Brian Tierney:

Yeah. So, we're working those regulatory processes, and you're going to see that from us. You're going to see certain things are in flight and certain things are coming, and look for us to be making progress on what's in flight, and that will foreshadow what's coming down the road. ESP V and Grid Mod II, we're working through those regulatory processes. I was reviewing last night, and we'll file today, our post-hearing briefing on ESP V, and we expect a constructive outcome there as we do in Grid Mod II. But regulatory tends not to move very fast. These are months long processes. And we think that the processes in both ESP V and Grid Mod II are constructive. And we anticipate it will be the same, but an actually longer process for our base rate case, which we'll file in April of this year. So we're just moving along. Things are happening as they should, and we're getting these constructive outcomes.

Jon Taylor:

Yeah, Michael. So we have another $700 million of former generation pension liabilities that we're looking at right now as to whether or not we should execute a lift-out transaction, something that we'll likely do this year if the market conditions warrant that. And then on the regulatory front, as we talked about before, some of these things take a couple of bites at the apple before we can get them in place. We did get authority to at least make a filing in West Virginia and New Jersey as part of the settlements. And we'll be thoughtful once we go through that process and get a final order on the cases as to the next steps there.

Brian Tierney:

Yeah. So we are at a different place than our peers. Announcing the increase that we did in September, the first in over three years, it's time to start rewarding our shareholders with dividend increases. And we felt that now is the time to do that. So September and anticipated in 2024, increases there as well. It's time for us to treat our shareholders the way utility companies traditionally do. And we're in a place where we're going to be growing the dividend with earnings over time. Our balance sheet is healthy. We don't have the equity needs that some of our peers do because of the transactions that we've done over the last three years or so. So we're in a different place and where some of our peers are, and we think it's a really good place.

Brian Tierney:

Thank you.

Jeremy Tonet:

Hi. Good morning.

Jeremy Tonet:

Good, good. Thank you. Just wanted to dive in a little bit more on the guide here, talking about rate-based CAGR of 9% relative to 6% to 8% EPS CAGR without additional equity needs. So it's just looking to kind of marry those two data points, given the stronger pace of rate-based growth there. If there's anything else we should be thinking about, especially the signal peak and pension OPEB become a smaller part of the equation?

Jeremy Tonet:

Got it. Maybe to rephrase the question slightly, just if the rate-based CAGR is 9%, are there any other drags besides lag to make EPS growth only 6% to 8%? Or is that a degree of conservatism?

Brian Tierney:

I think it's important to note that the part that Jon mentioned about pension and Signal Peak decreasing, as they decrease and as the traditional regulatory component of our growth increases, our earnings quality improves, and that happens really, really quickly in our plan. So that's also a benefit. It's not just growing earnings, it's a reduced risk profile as well.

Jon Taylor:

It is. That was -- the numbers that I gave you of share of wallet was an average across our five states. So -- and it's not significantly different in any one of those, but it's very, very low.

Brian Tierney:

Thanks, Jeremy.

Michael Lonegan:

Hi. Good morning. Thanks for taking my question.

Michael Lonegan:

So you've talked about some sustainable O&M you've taken out of your business and a larger increase this year and then have to that account for less than 2% increases over time. Given the significant ramp-up in CapEx over the years of your planning period, presumably, you'd have to expand your workforce or use of contractors is my guess to work on complete all those projects. I was just wondering, how are you planning on managing your O&M within that 2% increase level? Is there room to take out more existing costs out of the business?

Michael Lonegan:

Great. Thank you very much.

Operator:

Our next question comes from Angie Storozynski with Seaport Global. Please proceed with your question.

Brian Tierney:

Good morning.

Brian Tierney:

Thank you for the question, Angie. We absolutely do. And you're right, being mostly a wires company, certainly in four of our five states. We don't have as much of the generation opportunity. But I mentioned in my remarks, or in answer to an earlier question, the opportunity that we had associated with the PJM Open Window 3 for incremental transmission investment over $800 million. I had the pleasure of going out to our Maryland service territory late last year and got to go see what's going on at that quantum loophole data center development, it is unbelievable what's going on out there. They are recreating something that's on the scale of the data center footprint in Northern Virginia, out kind of in the hills of Western Maryland. And it's at a site of a former aluminum smelter out there. So you have these high-voltage transmission lines that go and just stop in the middle of space where the smelter used to be and where they're investing, they're turning dirt, they're moving ground right now, to build one of the largest data center complexes in the world. So we're seeing it in Maryland. It's going to be coming to Pennsylvania, in Ohio for us as well, and we're hopeful for New Jersey and West Virginia over time. So, it's coming, and it's real, and it does create incremental investment opportunities for us.

Brian Tierney:

So it's a good question, Angie. I think we've already seen some of that associated with things like the war in Ukraine and the like. And we saw that in some of the polar prices that we have when we went out for auctions during the period when we thought prices were going to be really, really high because of what's going on in Europe. And some of those price spikes went through to our customers, really in Ohio, beginning like the day I started on June 1 of last year. So we saw some of those price spikes go through to customer rates, and now they're coming off. As John mentioned earlier, we're having auctions that are printing lower prices and those lower prices are passing through to our customers. So I don't see that as being a big concern. There are some things that are moderating that impact. And again, our prices are so low. The share of wallet is so low for us that electricity still represents a significant value to customers in all five of our states.

Brian Tierney:

Thank you, Angie.

Paul Patterson:

Hey guys. Congratulations.

Paul Patterson:

Just wanted to sort of touch base again, I apologize, on this this single-digit increase, is that rates or is it bills? And can you be a little bit more specific in terms of what that means -- obviously, there's a big range there, right? Just a little bit more elaboration as to what you see sort of the rate trajectory range being associated with the with what you're planning long-term?

Paul Patterson:

New Jersey was 3.4%.

Paul Patterson:

And that's what you see going forward? Is that -- when you -- low single-digits is what you guys been?

Paul Patterson:

Okay. And then finally, on Grid Mod, do you see any settlement possibility? I know you guys sort of had thought about that before. There was sort of a delay in staff testimony. It looks like you're now talking about hearings. You expect that to be fully litigated at this point?

Paul Patterson:

Okay. I'll leave it there. Thanks so much guys. Have a good weekend.

Operator:

Our next question comes from David Arcaro with Morgan Stanley. Please proceed with your question.

Jon Taylor:

In this environment, there's not a lot of options. Obviously, we look at that quite frequently. It's not a core business for us. We've looked at that in the past several times, it's just -- there's not a lot of buyers out there. And so the options are fairly limited. But if you think about it in the grand scheme of things, it's going to be such a de minimis part of our company moving forward that it's not going to have the same impact that it's had the last couple of years.

Brian Tierney:

Thanks David.

Sophie Karp:

Hi, good morning. Thank you for squeezing me in here.

Sophie Karp:

Most of my questions have been answered -- most of my questions have been answered. Maybe I can just ask you about the balance sheet. Are you completely happy with the balance sheet shape at this point? And if not, what are the incremental goals here in terms of credit ratings, incremental balance sheet strength? Or are you completely satisfied that you kind of done?

Jon Taylor:

Yes. And Sophie, I would just add, if you think about where the company has come from withholding company debt probably in the 30% plus range, Today, it's 26% with a plan to get it to 20% or better by 2026. And that's a strong story. And it really started back in late 2021 when we announced the – the equity transactions with Blackstone and Brookfield and then we followed it up with a second transaction with FET for another $3.5 billion. And we all did that in a very shareholder-friendly way. So we're excited about where the balance sheet is headed, and we wouldn't have this capital plan without the strong balance sheet that we have.

Jon Taylor:

Thank you, Sophie.

Anthony Crowdell:

Hey, good morning. Thanks you squeezing me in. I had five questions, Shar ask them all though. But just, I guess, quickly -- you've had a big eight months. I appreciate the CapEx update. It seems that you've accomplished a lot of what you were planning. Just the year ahead, what should we expect?

Anthony Crowdell:

Great. Again, congrats. Thanks again for taking the question.

Operator:

We have reached the end of the question-and-answer session. And this concludes today's conference for today. You may disconnect your lines at this time, and we thank you for your participation.

Irene Prezelj:

Thank you. Good morning, everyone and welcome to FirstEnergy’s third quarter 2023 earnings review. Our President and Chief Executive Officer, Brian Tierney, will lead our call today and he will be joined by Jon Taylor, our Senior Vice President and Chief Financial Officer. Our earnings release, presentation slides and related financial information are available on our website at firstenergycorp.com. Today’s session will include the use of non-GAAP financial measures and forward-looking statements. Factors that could cause our results to differ materially from these statements can be found in our SEC filings. The appendix of today’s presentation includes supplemental information, along with the reconciliation of non-GAAP financial measures. Now, it’s my pleasure to turn the call over to Brian.

Jon Taylor:

Thank you, Brian, and good morning, everyone. We had a strong quarter, which showcased our commitment to operational excellence and financial discipline. This work enabled us to offset the impact of continued unseasonably mild temperatures across our service territory and deliver operating results near the top-end of our guidance. In addition, we’re also making good progress on our regulatory initiatives, which I’ll review in more detail in a few minutes. Let’s start with a review of our financial performance. As Brian mentioned earlier, third quarter GAAP earnings were $0.74 a share and operating earnings were $0.88 a share. This compares to 2022 third quarter GAAP earnings of $0.58 a share and operating earnings of $0.79 a share. And on a year-to-date basis, operating earnings are $1.94 a share compared to $1.91 a share in 2022 despite significant headwinds from our pension plan and lower weather-related distribution sales. Our performance in large part is due to intense focus on our operating expenses. Lower company-wide O&M improved operating results by $0.08 a share in the third quarter and $0.21 a share on a year-to-date basis, representing a 13% reduction when compared to the first 9 months of 2022. And our expectation for the full year is an O&M reduction of roughly 15% versus 2022 levels. About 50% of that is unique in nature, including spending we accelerated in 2022, with the other 50% being sustainable cost reductions that we will build upon in 2024 and beyond, primarily related to improved productivity across the entire organization, reduced use of contractors and lower spending on branding and advertising, just to name a few. We’re also running ahead of plan with capital spending in both our transmission and distribution businesses. Strong planning and execution across our operations and supply chain teams as well as the need to respond to more severe and capital-intensive storm events, resulted in an increase to our 2023 forecasted capital investment of nearly $300 million to $3.7 billion from our original plan of $3.4 billion. Looking now at the drivers for each of our business units for the third quarter. Results in our distribution business benefited from the diligent focus on operating expenses as well as our formula rate capital investment programs and rate structures. Together, these helped to offset the impact of a lower pension credit, higher financing costs, mostly associated with new debt issuances and the impact of mild weather on distribution sales. Mild summer temperatures with cooling degree days 17% lower than the third quarter of 2022 and 6% below normal drove a 3% decrease in total customer demand and impacted earnings by $0.06 a share compared to last year. Sales to residential customers decreased nearly 4% compared to the third quarter of 2022 resulting from a 6% decrease due to the mild summer weather, partially offset by a 2% increase on a weather-adjusted basis. Year-to-date, weather-adjusted usage in this customer class is about 2% higher than our forecast and last year, and about 5% higher than 2019 pre-pandemic levels. In the commercial sector, demand decreased just over 1%, resulting from a 2% decline in the mild temperatures but increased over 1% quarter-over-quarter on a weather-adjusted basis. Year-to-date weather-adjusted usage is flat to last year and continues to lag pre-pandemic levels by about 5%. Finally, sales to industrial customers were flat compared to the third quarter and year-to-date periods of 2022 and remain slightly lower than pre-pandemic levels. Looking at our transmission business, third quarter results increased as a result of rate base growth of 8% associated with our energizing the future investment program. So far this year, we deployed $1.2 billion of capital in our transmission business, an increase of $400 million or 50% versus last year and nearly $200 million or approximately 20% above our plan. Highlighting just a few of the many projects currently underway, in Northeast Pennsylvania, we’re rebuilding 20-mile 115 kV transmission line to enhance service reliability and improve system resiliency. In Ohio, we’re rebuilding a 20-mile section of a 138 kV power line in Belmont and Harrison Counties which is in the third phase of a larger 64-mile project to enhance service reliability, improve system resiliency and accommodate increasing customer demand. And in West Virginia, we’re upgrading 4 miles of a high-voltage transmission power line in Preston County to reinforce local transmission system against severe weather, meet future energy demands of the region and enhance service reliability for 5,000 customers in the Kingwood area. For the full year, we now anticipate transmission formula rate investments of over $1.8 billion versus our original plan of just under $1.7 billion. In our corporate segment, our results for the third quarter largely reflect the tax benefit from the expected use of state net operating loss carry-forwards, which we discussed on the second quarter call that reduced our consolidated effective tax rate for the year. As Brian mentioned, throughout 2023, our consistent operational and financial execution, including growth from our investment plan, significant cost control and other financing and tax benefits has more than offset the headwinds from pension and the impact of lower weather-related distribution sales which for the first 9 months of this year impacted results by $0.18 per share versus normal. I’m proud of how all of our employees have addressed these challenges and supported our commitments. While 2023 is not over, our 2023 debt financing plan is now complete, with 6 long-term debt transactions at our regulated operating companies totaling $1.6 billion, with an average coupon of 5.41%, slightly below our plan of 5.5%. Also earlier this year, FE Corp. issued $1.5 billion of convertible debt with a coupon of 4% that allowed the company to refinance revolver borrowings costing more than 7% and to make a voluntary pension contribution to eliminate minimum funding requirements in 2025. Additionally, earlier this month, we extended the maturity date on our $4.5 billion revolving credit facilities to October 2027 and added 2 new revolving credit facilities, including a $1 billion facility at FET LLC and $150 million facility at CatCo. Moving forward, we will have $5.65 billion of credit facilities to support our increasing capital programs. As we look to 2024 and 2025, our debt financing plan is minimal since the majority of the FET asset sale proceeds will be received at closing, with the remainder anticipated before the end of 2024. We plan to use these proceeds to repay costly revolver borrowings and depending on the interest rate environment will be used to redeem high coupon holdco debt, such as the 738 notes of which $460 million remain outstanding, retire maturing utility debt and/or defer other utility debt issuances. The funding from the FET transaction, our light debt maturity schedule plus the decision we made to issue the low-cost convertible debt provides significant flexibility with our utility debt financing plan, which other than refinancings and new money requirements at our stand-alone transmission companies could be as low as $2.1 billion over the next 2 years. And as for FE Corp’s holdco debt, we only have $300 million that matures in 2025. All that said, we’re uniquely well positioned for the current interest rate environment with minimal earnings sensitivity to interest rate increases over the next couple of years. Now let’s turn to an update on our rate proceedings and other regulatory activity. As we’ve discussed, we filed three base rate cases earlier this year, representing more than $7 billion of rate base. As Brian said, last week, we received an order in the Maryland base rate case that aligns with our goals to continue meeting the energy demands of Potomac Edison’s rapidly growing population. The order authorized an equity capitalization ratio of 53% with an equity return of 9.5%, recovery of regulatory assets associated with both COVID and electric vehicle infrastructure, while also providing support to help our strategy of strong reliability and resiliency in support of the energy transition. The new rates went into effect October 19. We’re also happy with the progress on the New Jersey and West Virginia base rate cases. In New Jersey, we’ve entered into settlement discussions on our proposed revenue increase of $192 million, and in West Virginia, our hearing is set for late January and our $207 million base rate case with new rates expected to be effective in March of next year. Other recent regulatory updates include in Pennsylvania, FERC approved our application to consolidate our four Pennsylvania distribution utilities in August, and the parties to the case filed a settlement agreement with the Pennsylvania Public Utility Commission on August 30. The settlement includes $650,000 in bill assistance for income-eligible customers over 5 years, supports unification of rates over time and includes a tracking mechanism to share certain cost savings associated with the legal entity consolidation with customers. With the ALJ’s recommended approval of the settlement, which is pending final regulatory approval, we expect the consolidation to close by early 2024. This consolidation aligns with our state operating model is an important step to simplify our legal entity structure and increase the flexibility and efficiency of our financing strategy. In Ohio, hearings for our Grid Mod II filing are scheduled to begin in December. This 4-year $626 million capital investment plan will support our continued work delivering safe, reliable power, offering modern customer experiences and supporting emerging technologies. And in November, hearings are scheduled to begin on our fifth Ohio electric security plan which supports our generation procurement process for non-shopping customers as well as investments in the distribution system, storm and vegetation management riders and energy efficiency programs. Our proposal also supports low-income customers and electric vehicle incentives. We have requested approval for the new ESP effective June 1 of next year. In West Virginia, we reached a unanimous settlement in our depreciation case, with an agreed-upon $33 million increase in depreciation rates, those rates will be effective upon conclusion of the West Virginia base rate case. And as Brian discussed, we received approval from the West Virginia Public Service Commission in August to move forward with construction of the first three utility-scale solar generation sites in the state. We expect the first site to be in service by the end of this year and all five sites to be completed before the end of 2025. And at a total investment cost of approximately $110 million. Just as a reminder, summaries of our key filings together with news releases and links to dockets are all available on the regulatory corner section of our Investor Relations website. Looking ahead, we plan to file our New Jersey infrastructure investment program in the next few weeks. And as you know, we are preparing for an active regulatory calendar in 2024. The performance of our team has been second to none by focusing on what we can control and a commitment to continuous improvement. We’ve delivered outstanding operational and financial performance. We’ve overcome the impact of historic unseasonable weather and other challenges to deliver solid results through the first 9 months of this year. We’re on track to meet our financial commitments, and we’re building a strong foundation for continued growth. Thank you for your time today. Now let’s open the call to your questions.

Operator:

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

Brian Tierney:

Good morning, Shar.

Brian Tierney:

Yes. Thank you for the question, Shar. You’re really forward-looking. So we’re still in the midst of the ESP V discussions and the Grid Mod II. So we’re in the throes of that, engaging with staff and interveners and trying to come to successful conclusions there. But as you – all the things you mentioned are what we’re going to be doing in the base rate case next year, it’s going to be taking things out of the trackers and riders that we have, getting them put into base rates, updating fully our rate base, our prudently incurred costs, storm tree trimming, regular O&M, financing costs, all that getting that in base rates and then moving forward with some healthy trackers that we will have at that point. There is nothing that’s going to be controversial in that case. It’s a traditional rate case, nothing special about it, but all the things that you’d expect a regulated utility to be doing. We found over time that the Ohio Commission has been very supportive of wires investments and we’re poised to continue making those and look forward to investing in the state of Ohio. A couple of things that we’re going to be cognizant of in that case. One is where we’re earning right now relative to what we think a normal authorized return should be. We’re well below 9.5% to 10.5% return on equity, and we need to get that increased, and our rates today are about 14% below our in-state peers. So to be honest with you, Shar, it’s too early for us to know what the bill impact is going to be, but we’re always looking for ways to minimize the bill impact to customers.

Jon Taylor:

Hey, Shar, this is John. Thanks for the question. So yes, if you look at our O&M performance year-over-year, about a 15% reduction from what we incurred in 2022 which is about $200 million, a little bit more than that. I would tell you about 50% of that is associated with timing of work that we accelerated from ‘23 into ‘22 and some unique items. But the other 50% is sustainable savings associated with just productivity improvements, getting contractors off the property doing the work ourselves, we had some benefits associated with contract terminations associated with sponsorships and branding relationships that we had and just a real intense focus on just general business items that we spend. So I would say about half of it is kind of unique. I would say the other half of it is sustainable savings that we will build upon as we go into next year. With respect to the pension, the pension performance year-to-date is about flat. So that is something that we have our eye on. A lot of that is associated with the interest rate environment, but we’re taking that into account as we think about the long-term.

Brian Tierney:

Thank you, Shar.

Jeremy Tonet:

Hi, good morning.

Jeremy Tonet:

Just wanted to touch base, I guess, on the financing plans a bit here. Given your CapEx refresh, could you clarify, I guess, what’s in the financing needs at this point? It looks like – there was prior language last quarter about no equity needs except for $100 million SIP DRIP and didn’t see that messaging in this deck. And just wondering if anything has changed there, what we should expect on that front?

Jeremy Tonet:

Got it. That’s helpful there. And then continuing along on the CapEx front, I just want to kind of run through some of the numbers by had it straight here, but looking at the ‘23 through ‘25 plan, the $12 billion, how that compares to the $18 billion in the ‘21 through ‘25 plan. I think you might have spent $2.4 billion in ‘21, $2.75 billion in ‘22. And it looks like your prior plan might imply $12.8 billion CapEx for ‘23 to ‘25 and so current plan $800 million less. I just wanted to know if I had those numbers right or if there were other moving pieces here, should we be thinking about or CapEx was decreased to any of the different subs?

Jeremy Tonet:

Got it. That’s helpful there. Thanks. Just last one, if I could. I think you talked about incremental business disclosures that could be coming forward here. Just wondering if you might be able to offer any incremental thoughts with regards to what type of information we could see there?

Jeremy Tonet:

Got it. That’s very helpful. I’ll leave it there. Thanks.

Brian Tierney:

Thank you.

Nick Campanella:

Hey, good morning, everyone. Happy Friday. Thanks for taking my questions. So I guess thanks for previewing the PJM transmission opportunity. As we kind of think about rolling that into our models, is this opportunity in the hundreds of millions of dollars. And I think you said back half of the plan? Or any idea how to size it at this point?

Nick Campanella:

Great. And then, I guess, just the cadence of updates from here because I know that there is a lot of moving pieces with the COO search to your point, some of the resegmenting and everything, should we still expect fiscal ‘24 guidance on the fourth quarter? And then how do you think about financing CapEx, etcetera?

Nick Campanella:

Okay, thanks. And if I could just squeeze one more in. Just I know that we will get 2024 guidance in the fourth quarter, but there were just some more one-time items in the fiscal ‘23 walk, I acknowledge you kind of brought up the pension headwinds in prepared remarks. How do you kind of think about the offset to those future headwinds like pension, the tax item, etcetera? I know we get a better comp on weather next year, but any guidance you could give would be helpful.

Nick Campanella:

Thank you.

Operator:

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

Brian Tierney:

Good morning David.

Brian Tierney:

So, we are – as you know, they have stayed the schedule for now to the last settlement discussions to continue. And we are working all of those things that you just mentioned are still in play, and we are still working – engaging with staff, interveners, others to try and bring a successful conclusion to that case and without having to take it through adjudication.

Jon Taylor:

Yes. I think we continue to have dialogue with the rating agencies. Those have been constructive conversations. They have our projections. It clearly shows that we are going to be in that 14% to 15% in ‘24 and ‘25. I will say that we have kind of taken a little bit of a step back this year in terms of our performance in the metrics. And a lot of that is because of the unseasonable weather, the fact that we made a voluntary pension contribution, we have – we had some one-off items associated with severance associated with the voluntary retirement program. So, if you kind of take those out of the mix, I mean, we are closer to that 11% range. But clearly, with the rate cases that we have in flight, which we risk adjusted in terms of what we are going to get, the fact that we are going to get now 100% of the FET proceeds in 2024, whereas before, it was going to be about 50% next year, 50% in 2025. So, we will have an opportunity to deploy all of that. It clearly shows that we will be in the 14% to 15% range next year.

Brian Tierney:

Thank you, David.

Angie Storozynski:

Thank you. Just following up on that FFO to debt question, so I am looking at your financials, I mean the FFO looks particularly weak, right, for the first nine months. And I hear the explanation of why that is. But I thought that we are waiting for some improvement, not even to hit that 14% to 15%, but just some improvement in the FFO to debt, to warrant any upgrades? And it doesn’t seem like it will happen this year, is that fair to say that the trailing 12 months doesn’t seem to have any upward momentum for now.

Angie Storozynski:

Okay. And my bigger question here, and I know that this is what we are all sort of the beating is that you obviously have this bullish EPS and now dividend growth plan. It’s pretty much contingent on the outcome of the distribution case in Ohio, and we won’t know that what happens there until probably very late to 2025. So, how do we get comfortable with that validation of your growth profile between now and then?

Angie Storozynski:

And then just lastly on the tax benefit, very big tax benefits. And I understand that you are trying to address the weather impact. I mean lots of headwinds actually this year, but you are also reflecting in the O&M lever. I mean did you expect to have this tax benefit this year, again – and is it cash related?

Angie Storozynski:

And that’s already reflected in the growth plan?

Angie Storozynski:

Along with those additional costs that will come with basically those additional managers that you are hiring for the utilities and the COO, right? All of this is reflected in your – in your EPS growth plan.

Angie Storozynski:

Okay. Thank you.

Operator:

Thank you. Our next question comes from the line of Jeremy Tonet with JPMorgan. Please proceed with your question.

Brian Tierney:

Yes. We are going to provide an update on the fourth quarter earnings call. So, we will do specific guidance for ‘24 and we will also update the capital plan at that time.

Brian Tierney:

Yes. We are – there is going to be no change in the long-term EPS CAGR.

Brian Tierney:

Thanks Jeremy.

Anthony Crowdell:

Hey. Good morning. Just hopefully two quick questions on – one on Slide 25, and I am not trying to run your rate case decisions in the jurisdictions. But when do you kind of think that we could see like normalized earnings coming from the utilities or maybe we are in a different way? Do you guys have a target of what you think you could earn across the OpCos?

Anthony Crowdell:

I guess you have answered my – sorry.

Anthony Crowdell:

Okay. And I think that actually answers my second question. I think earlier in one of the slides, I apologize I forgot the number. You guys give us – I appreciate the detailed rate base growth of about 7%. And to Jeremy’s question earlier about the long-term growth rate of earnings of 6% to 8%, I guess how – I was curious if you think there is going to be any lag or spread between the rate base growth and the earnings growth, but it seems that they are aligned because of this improvement in ROE. Am I thinking of that correctly?

Anthony Crowdell:

Great. Thanks so much for taking my questions. I am looking forward to seeing you at EEI.

Operator:

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

Brian Tierney:

Thank you, Gregg. I appreciate that. In terms of the key hires, I am spending and our senior executive team here is spending a significant amount of our time recruiting. I feel some of this we need to do sequentially. I need to get a COO in place, President of FE Utilities in place, and I would like those people to help us recruit then the people who are going to be reporting to the President of FE Utilities. And they will be the five people running our major businesses. So, sort of – and by the way, we are not waiting to interview a candidate pool for those five people. We are proceeding ahead on that as well. So sequentially, trying to get the COO, President of FE Utilities, then next the people that run our four businesses and get those people seated as quickly as possible. But moving very much forward on that, it’s active. We are trying to get this done as quickly as possible. But at the same time, making sure that we are getting the right people in the place who will bring the right skills to bear for the things that we are trying to do. And we have a very strong candidate pool for all of those positions that we are recruiting for. So, I am confident we will get success. The timing of it is going to be here in the, I would say, in the near-term and hope to be able to make those announcements shortly. In terms of putting the past behind us, A lot of that heavy lifting had been done by the Board and the management team before I got here. There is active engagement with the OOCIC. We are providing our updates for the DPA with the Department of Justice. And then for the remaining litigation that’s out there, we are moving forward with that, trying to settle what we can, but put that pass behind us and strongly focused on the future. And I don’t anticipate any unexpected hiccups there.

Brian Tierney:

Thanks Gregg.

Steve Fleishman:

Yes. Hi. Good morning.

Steve Fleishman:

Good morning. Just the cases in Ohio, the Grid Mod and the ESP filing, can you just talk to the schedule there coming up. And I know some of the other utilities have actually have been able to settle ESPs and the like. Is that possible for you?

Steve Fleishman:

And then on the Grid Mod, would that be kind of part of the same thing or separate?

Steve Fleishman:

Got it. Okay. Thank you.

Operator:

Thank you. Ladies and gentlemen, this concludes our question-and-answer session and concludes our call today. A replay of the call will be available on FirstEnergy’s Investor Relations website. Thank you for your participation. You may now disconnect your lines.

Irene Prezelj:

Thank you. Good morning everyone and welcome to FirstEnergy second quarter 2023 earnings review. Leading our call today is Brian Tierney, our President and Chief Executive Officer and Jon Taylor, our Senior Vice President and Chief Financial Officer. Our earnings-released presentation slides and related financial information are available on our website at FirstEnergyCorp.com. Today's discussion will include the use of non-GAAP financial measures and forward-looking statements. Factors that could cause our results to differ materially from these statements can be found in our SEC filings. The appendix of today's presentation includes supplemental information, along with the reconciliation of non-GAAP financial measures. Now it's my pleasure to turn the call over to Brian.

Jon Taylor:

Thank you, Brian, and good morning, everyone. Despite the extremely mild temperatures across our service territory in the second quarter, our focus on efficient operations in a financial discipline allowed us to deliver operating results above the midpoint of our guidance. I'll start today with a review of our financial performance and outlook, then provide an update on recent regulatory activity. As Brian mentioned, second quarter GAAP earnings were $0.41 a share and operating earnings were $0.47 a share. This compares to 2022 second quarter GAAP earnings of $0.33 a share and operating earnings of $0.53 a share. Second quarter results in our distribution business benefited from our ongoing capital investment programs and our laser focus on operating expenses. Together, these helped offset the impact of lower distribution sales, which largely resulted from mild temperatures as well as a lower pension credit. Mild temperatures with cooling degree days 48% below the second quarter of 2022 impacted residential demand by more than 8% and total customer demand by 4% with a year-over-year impact of $0.06 a share. Total residential sales decreased 11% from the second quarter of 2022 or 2% on a weather adjusted basis. On a trailing 12 month basis, weather adjusted residential sales continued to trend about 4% higher than 2019 pre-pandemic levels and for the June year-to-date period, they are 2% higher than last year. In the commercial sector, lower weather related demand drove a 6% decreased compared to the second quarter of 2022 while demand was down 3% on a weather adjusted basis. Usage by commercial customers over the trailing 12 month period continues to trend below 2019 levels by nearly 5% on a weather adjusted basis. Finally sales to industrial customers increased by just over 1% compared to the second quarter of 2022 and continue recovering towards pre-pandemic levels. As a reminder, revenue from our C&I customer classes are not as sensitive to sales volumes as a result of rate design for these classes, which is typically based off peak usage. In our transmission business, our results benefited from our energizing the future investment program and associated rate-based growth of more than 8% compared to the second quarter of 2022. Favorable weather and accelerated material deliveries allowed us to deploy nearly $400 million of capital into our transmission investment program during the quarter, bringing our year-to-date investments to nearly $750 million, which is over 20% ahead of our internal plan and $260 million or more than 50% ahead of last year. Looking at our corporate segment, second quarter results benefited primarily from lower operating expenses and lower interest costs, which helped to offset a lower earnings contribution from Signal Peak. We are very pleased with how we responded to the challenges we face this year, especially the impact of the extremely mild temperatures on distribution sales, which on a year-to-date basis is $0.18 per share below last year and $0.16 per share off plan. The team's effort allows us to confirm our guidance range this year of $2.44 to $2.64 a year. First, our focus on our cost structure, particularly our operating expenses, has been second to none. As you can see, our O&M has improved $0.13 a year, year-over-year, and is well ahead of our internal plan. Our focus on managing our labor costs through productivity improvements and selective hiring is paying off. In addition, in May, we announced an involuntary separation program and a voluntary early retirement program impacting approximately 550 employees. And we continue to focus on third-party and other operating costs, including corporate facility costs, branding and sponsorships, and improved customer collection rates, which has helped us lower our bad debt expense. Currently through June, our base O&M is running about 6% below plan and 11% below last year. And the expectation in the second half is for that trend to improve versus last year, given some of the steps we have taken to further reduce costs and the maintenance work we accelerated from '23 into '22. Second, in early May, we completed a very successful sale of $1.5 billion in convertible senior notes with a coupon rate of 4%. The initial conversion price represents a premium of approximately 20% from our closing share price on May 1. We consider this a cost-effective bridge to when we receive the full $3.5 billion from our previously announced agreement to sell a 30% interest in first-energy transmission LLC. The use of proceeds will be EPS accretive as we repaid high-cost short-term borrowings, reduced 738's coupon debt at FE Corp, and made a $750 million contribution to our pension plan, which had required contributions beginning in 2025. As a result, our net qualified pension obligation improved to approximately $800 million at the end of the second quarter, down from $1.7 billion at the end of last year, representing a funded status of 91% at the end of June. In addition, we don't have any minimum funding requirements through 2027. The convertible note issuance supports our ongoing work to optimize our financing plan, improve our credit metrics, and our balance sheet as we target FFO to debt metrics of 14% to 15%. Finally, we do anticipate a lower effective tax rate for the year, closer to 17%, resulting from the expected use of state net operating loss carry-forwards. Again, despite the extremely mild temperatures we've seen this year, the team has worked extremely hard to rise to the challenges so we can deliver on our commitments. Now let's shift gears and talk about our rate proceedings and other regulatory activity in the quarter. I'll start with the three base rate cases we filed earlier this year, these cases, which represent over $7 billion of rate base, and weighted average test year return on equity of less than 6% are progressing well through the regulatory process and consistent with our expectations. In New Jersey, we received a procedural schedule for our proposed revenue increase of $193 million, with evidentiary hearings to be held in early January of next year. In Maryland, very constructive evidentiary hearings were held last month on our proposed $50 million rate case, which was filed in March and supports equity returns of 10.6%. We do expect new rates to go into effect in October of this year. And in West Virginia, our Mon Power and Potomac Edison West Virginia utilities filed a base rate case in May, requesting a $207 million increase in revenue to support reliability investments, grid resiliency, our generation assets, and an enhanced customer experience, while providing assistance to low income customers. Key proposals in the filing include distribution rate base of $3.2 billion, and return on equity of 10.85%. A hearing has been set for January of next year, and new rates are expected to be effective by the end of March. Importantly, even with the proposed rate adjustments in each of these jurisdictions, our customers would continue to have some of the lowest residential rates among their in-state peers. Other regulatory activity also continues to progress. We filed our Ohio Electric Security Plan 5 in early April. As we discussed on our first quarter call, our proposal supports our generation procurement process for non-shopping customers, continued support for investments in the distribution system, storm and vegetation management riders, and energy efficiency programs. Our filing also includes proposals that support low income customers and electric vehicle incentives. We have requested approval for the new ESP effective June 1 and next year, when the ESP-4 ends, and hearings are scheduled for November of this year. We also received a procedural schedule last month for the Ohio Grid Mod 2 filing we made last summer. Under the schedule hearings are planned for October of this year, and we look forward to advancing the $626 million capital investment plan to continue our work enhancing the delivery of safe, reliable power, offering modern customer experiences, and supporting emerging technologies. And Pennsylvania hearings have been set for next week to consider our application to consolidate our four Pennsylvania distribution utilities. As we stated, this is an important step to align with our state operating model, simplify our legal entity structure, and increase the flexibility and efficiency of our financing strategy. And we are in settlement discussions with the parties to the case. And in May, FirstEnergy in Brookville submitted applications to FERC and to the Pennsylvania PUC to facilitate the FET minority interest sale that was announced in February. We have received approval for the sale from the Virginia State Corporate Commission, and the transaction also requires successful review by CFIUS. Finally, Mon Power is no longer reviewing the possible purchase of the pleasant power station. Last week, FERC approved the sale of the plant to a subsidiary of Omnia's Fuel Technologies. We will file an update with the West Virginia Public Service Commission when that sale is complete. So, all in all, several regulatory proceedings in flight, but everything is progressing very well and consistent with our plan. The regulatory team and the employees that support the regulatory filings are doing a terrific job, and we couldn't be happier with the progress. As a reminder, you can find summaries of our key filings together with news releases and links to the dockets on the regulatory corner section of the IR website. I'm very proud of our team's performance despite the challenges we have faced this year. We are on track with key regulatory initiatives, and we're executing very well in the areas that we control with strong capital deployment and financial discipline with our operating expenses. Thank you for your time today. Now let's open the call to your questions.

Jeremy Tonet:

Hi, good morning.

Jeremy Tonet:

Just wanted to start off, I guess, if we're looking to 10-Q a little bit here. Notice this OO CST subpoena, and was wondering if you might be able to provide a bit more detail on what that entails and could that impact the DPA in any way?

Jeremy Tonet:

Got it. That's helpful. Thanks. And just with regards to signal peak, I was just wondering if you could provide any updated thoughts as far as asset earnings profile and I guess, how core that asset is or any other details you could share there?

Jeremy Tonet:

Got it. And any update thoughts on what percentage of earnings that might look like in the future, given what you described there?

Jeremy Tonet:

Got it. That's very helpful. One last one if I could. Brian, it seems like you've undertaken a number of new strategic initiatives and some, it seems like some geographic decentralization efforts and overall. Just wondering how significant do you think the synergies could be over time, with some of the strategic measures that you've been, you have undertaken at this point?

Jeremy Tonet:

Got it. That makes sense. Very helpful. I'll leave it there. Thanks.

Operator:

Thank you. And our next question is from Mr. Steve Fleishman with Wolfe Research. Please proceed with your question.

Brian Tierney:

Good morning. Thanks.

Brian Tierney:

Yes. So I've reached out to the commission there and employees. I've not had a chance to speak with the executives in the state yet but are still trying to get those scheduled. I'll say that the commission there is and always has been very, very professional, engaged, experienced and dedicated to making sure that utilities make the investments that improve reliability and the customer experience in the state. And that Steve really hasn't stopped over the last three years, right? We're concluding grid mod one. We're concluding the ESP-4 right now. So Ohio over time has been very effective in making sure that there are those riders and trackers in place to make the specific investments that the commission wants us to make. And when I met with the commissioners there, they seemed very focused on making sure that we continue to engage in those activities, those processes and those investments going forward. What I have with everyone I met with, there will be a time and a place to deal with the activities of the past and people have documents ready to do that. And I've committed that, like we have in other venues, that the company will take responsibility for that and do the right thing. But there's a real desire to make sure that we focus on the go forward business. And there seems to be no regulatory hangover associated with the past either in Ohio or in West Virginia or New Jersey that I've also visited with.

Brian Tierney:

Yes. So thanks Steve for exposing my coded language there. Yes, that's what we're looking to do, is go to places where we are underearning either due to the fact that we haven't been in for a long time or that we've made significant investment that hasn't been updated and make sure that we get investment reflected in rate base and that we ask for authorized ROEs that are more consistent with what you're seeing across the industry rather than the lower ROEs that we're currently earning.

Brian Tierney:

Yes, so we've been to see all three of the rating agencies recently. We've been on a watch for a change for Moody's for over 18 months now, have paid special attention there trying to give them what they could need. We hope that they will take action here in the near future in a positive way. As we look at S&P, I think they're looking for final resolution of the DPA, which will happen hopefully in 2024, as well as FFO to debts that are consistently moving above the 12% range. And we hope to be doing both of those here in the near future.

Brian Tierney:

Thank you, Steve.

Shar Pourreza:

Hey guys, good morning.

Shar Pourreza:

Good morning. John, I wanted to just really just get a little bit deeper on Signal Peakif it's okay with you and start a needed course here. But the prices have declined another 30% since that Q1 update. Because we're thinking about maybe full prices, any hedging you may have in place and what hedges you are off. I guess how does all this tie in with the linearity of your 6% to 8% growth rate? In other words, as we're thinking about '23, '24, is there enough levers like O&M and liability management to mitigate incremental signal speed pressures as we're thinking about your annual guidance and where is that growth rate?

Shar Pourreza:

Okay, perfect. That's an important point. Thank you for that. And then obviously, we're approaching the Ohio case next May, which is, I think, a very key event we're all going to monitor for obvious reasons. Just remind us on the drivers of the case. Is it capitals at rate-based deferred costs? How we should think about, maybe, that are we request in relationship to what you're earned or we are, especially if there's a chance to commission diverts from historical precedence on treatment of goodwill there? So how do we put all this together into that case? And then also, how are you messaging or will message around rate impact? Or would you still think it'll be built in neutral? Thanks.

Shar Pourreza:

Okay. Perfect. Thanks, Jon for that. It's super helpful. And, Brian, congrats on your first earnings call. See you guys.

Operator:

Thank you. And our next question is from Mr. Julien Dumolin-Smith with Bank of America. Please proceed with your question.

Brian Tierney:

Thanks, Julien. Good morning.

Brian Tierney:

Yes, great question, Julien. Let me give you a little bit of context as to what we're seeing. So when you think about the original plan that we had going into '23, we had to have plan for about a 12% year-over-year O&M reduction relative to '22, which was right at about a [billion five] of base O&M. Okay. I would tell you about half of that was what I would consider timing or one time primarily associated with the work that we accelerated from '23 into '22 to help mitigate the pension. But the other half was sustainable O&M reductions around productivity improvements, around lower branding and advertising costs, some efficiencies that we were getting to transition to more data and analytics to drive more efficiency in our operations. And so that was the original plan. Later on top of that, the impact of the voluntary and involuntary program, we'll continue to see more sustainable savings going forward. And I think what that will result in is about the only thing that you'll really see going into '24 is that one time, which is about $100 million or so of incremental O&M that you'll see into the plan going into 2024, everything else will be sustainable and will be used to offset any type of inflation going forward. So really what we're anticipating, if you look at our current forecast this year versus '22, we've gone from about 12% improvement to about a 15% improvement with about half of that flowing back into next year.

Brian Tierney:

Yes, great question. So I would tell you with the first FET transaction, plus the common equity issuance, we improved the capital structures in New Jersey, West Virginia, and Maryland by probably anywhere from two to three points. So we were probably 49, 45% and now we're close to 50, if not above 50% in those jurisdictions where we have rate proceedings ongoing. If you think about the next FET transaction, which will close next year, a lot of about half of that, those proceeds have been deployed already through the convertible note offering. So we put that money to the pension, we took out some holding company debt, and then we reduced short-term borrowings. With the other 50%, we'll look to improve the capital structures primarily in Pennsylvania, which right now are about 49%, and we'll look to improve that to, close to 53% as we gear up to file that case next year.

Brian Tierney:

Thanks, Julien.

Angie Storozynski:

Thank you. I appreciate the message. It's been decades. Thank you. So first on Moody's, have you spoken to the agency since you received the new subpoena? And I'm just wondering if that has a chance of, anyway derailing the upgrade that we've been waiting for?

Angie Storozynski:

Okay, and there's no news on the FCC investigation or any sort of settlements or any quantification of the potential downside here?

Angie Storozynski:

Okay, and then moving on to the equity layer in Ohio. And I know we've talked about it before. The Goodwill, substantial Goodwill and how you calculate your equity layer. I mean, is there any concern as you go into this distribution rate case about, how the commission is going to calculate the equity layer in Ohio?

Angie Storozynski:

Okay. And lastly, just looking at the performance of your pension funds and I'm just wondering. So I'm assuming that the opposite is going to be true, meaning that there will be a potential gain that will support your 24 earnings. And so if there is any O&M inflation, it will be more than offset by that potential gain and any efficiencies on the O&M side that you talked about earlier, is that right?

Angie Storozynski:

Good. Thank you.

Operator:

Thank you. And our next question comes from the line of Ms. Sophie Karp with KeyBanc Capital Markets. Please proceed with your question.

Brian Tierney:

Good morning, Sophie.

Brian Tierney:

You were cutting out, Sophie. I think your question was, we provided an ROE of 7.3% on a consolidated basis. Is there any disparity between that amongst the three utilities in the state?

Brian Tierney:

I don't have that information here readily available. But I would imagine there would be some disparity between the three companies. I think it would be significant, significantly different from the 7.3% . But we would typically file in the state all three companies at the same time. And so that's why we provided at the state level.

Brian Tierney:

Yes. So I guess there's two steps to that, right? First, like we're doing in Pennsylvania, it's a legal entity consolidation. We're still going to have four separate rate books in Pennsylvania, and we'll merge those probably over a period of two to three rate cases. And we'll do the same thing in Pennsylvania. So, excuse me, Ohio. We'll make the filing to do the consolidation on a legal entity basis, but we'll still have, three separate rate books, and we'll merge those over time.

Brian Tierney:

Well, the performer for the Brookfield Transaction closing, when we deploy all the proceeds, would support the 14% to 15% that we're targeting. If you look at on a trailing 12 month basis, I'm assuming it's probably close to 10.5%. We were at 10.5% at the end of last year. So as we start to receive the proceeds in next year, deploy those proceeds, you'll see a pretty significant improvement. We'll also have rate relief in New Jersey, West Virginia, Maryland that will help the metrics going into next year. But right now I would anticipate the plan with the pension contribution for the full year of ‘22 being close to 11% FFO to debt for this year.

Brian Tierney:

Thank you, Sophie.

Gregg Orrill:

Yes, thank you. Maybe a follow-up on the O&M, and just how you're thinking about that, longer term throughout the plan, what levels can you achieve, what areas can you look at to drive out those cuts or efficiencies? Thanks.

Brian Tierney:

Greg, we've talked about this internally, right? I've seen utilities that are the premier utilities in the industry have continuous improvement as part of their culture. And we've had a program in FE Forward, which this year is beginning to pay significant dividends as employees are embracing the tools that we've given them to be able to do that. We're going to make that not a program, but part of our culture and DNA going forward, that we're not going to brand as FE Forward. We're just going to call it continuous improvement. And our goal will be to flatten or even decrease that O&M curve over time as part of an overall program that is continuous improvement, not just O&M savings.

Brian Tierney:

Thanks, Greg.

Paul Patterson:

Very good morning.

Paul Patterson:

So just on the subpoena, the timing, this seems a little odd to me. From meeting the 10-Q, it seems to me that you guys weren't aware of this investigation. And if the subpoena shows up, I guess, so late in the day, it seems. Any thoughts about that?

Paul Patterson:

Okay. I mean, do you have any discussions where they're explaining it, or you can relate to us about what might be going on, I guess, with respect to them? Is that right?

Paul Patterson:

Okay, great. And then with respect to your discussions with regulators around your service territories, I noticed that you guys have been involved, or at least proposing, it seems to me, increased funding for low-income, affordability-challenged ratepayers, if I'm correct. I was just wondering, how is the regulatory reaction to that? Do they see that as going in a long way to sort of addressing the issue of rate concerns?

Paul Patterson:

Absolutely. And no, I understand that. I guess maybe I'm not asking it right. I guess what I'm wondering is, when you approach them with that proposal, are they receptive? Or, I mean, maybe too early to say, or what have you. But sometimes the jurisdictions get more concerned about the actual total sort of impact in other jurisdictions. It seems like if you can sort of address the issue of those most at risk, I guess, of adverse issues, that that seems to go a long way. Do you follow what I'm saying? Do we have any flavor on that?

Paul Patterson:

Okay. Sorry. I'm sorry. Maybe I didn't hear correctly. I apologize. And finally, there's this Chevron doctrine that's being that I guess it's the Supreme Court, and it's kind of a significant issue, it seems like actually just in terms of EPA, FERC, what have you, I don't know what to sort of make of it in terms of what the potential impact might be, and I was wondering, do you guys have any sense about what a substantial change in this sort of long-held, sort of regulatory approach to things might be if the, if the Supreme Court, as some might, are speculating, would be would take, would have a new, completely different take on it.

Paul Patterson:

Sure. I can imagine that. I'm just wondering if there's any thoughts that you guys have about it, but I can understand there's other stuff going on. Thanks so much.

Operator:

Thank you. And our next question comes from the line of Mr. [indiscernible]. Please proceed with your question.

Brian Tierney:

Paul, we just feel like we've taken responsibility for the activities that are outlined in the DPA and have paid the fine for that and taken responsibility for it. So I really don't know the answer to your question.

Brian Tierney:

Yes, that would be unusual.

Brian Tierney:

Okay. Thanks, Paul.

Brian Tierney:

Okay. We'd just like to thank everyone for their participation in today's call. We look forward to continuing this dialogue going forward. Appreciate your interest and are pleased with the quarter and look forward to seeing you next time.

Irene Prezelj:

Thank you. Welcome to our first quarter 2023 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 today’s discussion and other detailed information about the quarter can be found in the strategic and financial highlights document on the Investors section of our website. We will begin today’s call with presentations from John Somerhalder, our Board Chair, Interim 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 will turn the call over to John Somerhalder.

Jon Taylor:

Thanks, John and good morning, everyone. Although we were significantly impacted by the record-breaking mild temperatures this winter, our underlying business fundamentals remain strong and on track. I will begin my remarks with a regulatory update, then I’ll review our first quarter financial results. Last month, we kicked off a period of significant regulatory activity. Since early March, this includes an application to consolidate our 4 Pennsylvania utilities, which is an important step to align with our state operating model, simplify our legal entity structure and increase the flexibility and efficiency of our financing strategy. We also filed rate cases in New Jersey and Maryland that support critical reliability investments, a modern electric grid and enhancements to the customer experience, while maintaining the lowest residential customer rates among regulated electric distribution companies in both states. Since our last JCP&L rate case in 2020, we’ve made nearly $800 million in investments to modernize and strengthen the electric grid. The JCP&L proposal represents a $185 million revenue increase and supports distribution equity returns of 10.4%. It features enhanced recovery of storm balance costs, expanded vegetation management programs, recovery program costs related to AMI, in electric vehicles and a proposal to normalize pension OPEB costs. The proposal also confirms our plan to file an infrastructure investment program later this year. In Maryland, our proposal for a $44 million net revenue increase supports equity returns of 10.6%. It includes a proposal for the second phase of the electric distribution investment surcharge program, a pension OPEB normalization mechanism and a cost recovery proposal related to COVID and electric vehicle balances. And in Ohio, we filed our fifth electric security plan to support our generation procurement process for non-shopping customers, continued investments in the distribution system, storm and vegetation management writers and energy efficiency programs. The filing also includes proposals to support low-income customers and the electric vehicle customer experience. We requested approval for the new ESP to be effective on June 1, 2024, when the ESP four ends. We’ve included a summary of the key filings together with news releases and links to the dockets on the new regulatory corner section of our IR website. We received a lot of positive feedback about this resource, and we’ll continue to update the site as we move through each of the proceedings. Later this quarter, we plan to file a rate case in West Virginia. And looking further ahead, we are considering the appropriate time to file for new base rates in our third long-term infrastructure investment program in Pennsylvania and we will file a rate case in Ohio in May of 2024. While each utility in each case have unique circumstances, we have noted that recent base rate cases involving other investor-owned utilities in Ohio have been resolved with equity capital structures in the 50% to 54% range and support of ROEs in the 9.5% to 9.9% range. These outcomes align with our plan, which includes the financial impact of our 2021 approved settlement that provided for over $300 million in refunds and bill credits to customers as well as continued rate based growth and the accounting changes that we previously discussed, all of which significantly lowered the returns at our Ohio utilities. I want to spend a few extra minutes on the recent generation filing in West Virginia, where we are working with a broad group of stakeholders to ensure we find the best outcome for our customers. Last December, the Public Service Commission ordered Mon Power to provide an evaluation of purchasing and operating the Pleasants Power Station, a coal-fired plant that we understand is currently slated for closure on May 31. The concept of a potential acquisition of Pleasants was suggested by stakeholders in West Virginia as a replacement for our Fort Martin station, which has a proposed end-of-life date of 2035. We responded to the commission last month indicating that additional time and analysis are needed to properly complete the necessary and complex assessment. Mon Power proposed an option to enter into an interim arrangement with Pleasants’ current owner that would keep the plant operational beyond its May 31 deactivation date. This would allow the needed time to do a thorough analysis and evaluation as requested by the West Virginia PSC. On Monday, the Commission approved our proposal. We will begin negotiations with the plant’s current owner. If we reach an interim agreement that we believe is in the interest of customers and FirstEnergy, we will submit it to the commission. And if approved, this would allow recovery of associated cost through a surcharge. If we can’t reach an agreement that is in the interest of our customers, we will file an update with the commission. To be clear, we don’t see it as a viable option for Mon Power to operate 3 coal-fired power plants in West Virginia. We will continue to work through the process with the PSC and strive for an outcome that best serves our customers, communities and employees in West Virginia. At the same time, we are moving forward with our efforts to support the energy transition across our footprint and we remain committed to our climate strategy and our goal to achieve carbon neutrality from our Scope 1 emissions by 2050. Mon Power continues securing commitments from residential, commercial and industrial customers in the state to purchase solar RECs from our 5 planned utility scale solar generation facilities totaling 50 megawatts. This week, we filed an update with the Commission to begin moving forward with 3 of the 5 sites, totaling 30 megawatts of capacity and to obtain approval of a small surcharge. Turning to first quarter results and other financial matters, first quarter GAAP earnings were $0.51 per share and operating earnings were $0.60 per share, which is just below the midpoint of our guidance despite the impact of a very mild winter across our footprint. Absent the impact of weather, we were on plan for the quarter. In our distribution business, first quarter results benefited primarily from our capital investment programs, higher weather-adjusted load and lower operating expenses, including employee benefit costs and the maintenance work we accelerated into 2022. These were offset by a significant decrease in weather-related demand, lower pension credits and higher financing costs related to our financing activity in the second half of 2022. Record-setting mild temperatures this winter, with heating degree days 18% below last year impacted total customer demand by 8% or $0.12 per share. On a weather-adjusted basis, distribution deliveries increased more than 2%, which was very nice to see. Residential sales decreased 8% from the first quarter of 2022, but increased 5% on a weather-adjusted basis. Compared to pre-pandemic levels, weather-adjusted sales to residential customers are trending about 4% higher. In the commercial sector, deliveries decreased 7% compared to the first quarter of 2022 due to lower weather-related demand, but increased almost 2% on a weather-adjusted basis. While sales to commercial customers continue to recover, they lack 2019 levels by more than 4%. Finally, first quarter 2023 sales to industrial customers decreased slightly compared to the first quarter of 2022, driven by the chemicals, metals and plastics sectors. Industrial sales remained just below pre-pandemic levels, but we continue to see fairly strong growth in some of our other industrial sectors, such as steel, services and other manufacturing. As for weather-adjusted load, we do expect a positive trend to continue relative to our plan, especially in the residential class, helping offset some of the lower weather-related sales we experienced in the first quarter. Additionally, operating expenses in our distribution business reflect the continued focus on our cost structure, and we are pursuing additional cost reductions to further offset the impact of mild first quarter temperatures. Turning to first quarter drivers in our transmission business. Results primarily benefited from rate base growth of 8% compared to the first quarter of 2022 associated with our Energizing the Future investment program, offset by dilution from the minority interest sale in FET that closed in May 2022. As Jon mentioned, we started the year off strong with our capital investment program in our transmission business, deploying nearly $350 million of capital, which is significantly above our internal plan. First quarter results in our Corporate segment benefited from higher investment earnings from Signal Peak and lower financing costs associated with holding company debt redemptions in 2022, which more than offset the lower pension credit. Signal Peak’s contribution in Q1 of this year was $0.08 per share, but we expect a slight decrease to its projected earnings for the full year due to current forward market prices for coal. While weather had a significant impact for the first 3 months of the year, it’s not taking us off our plan. We expect to offset the weather impact this quarter as well as projected lower earnings contribution from Signal Peak through stronger weather-adjusted load, additional cost reduction opportunities as well as opportunities to optimize our financing plans. Thank you for your time this morning. We recognize we have some work to do given the mild winter temperatures this quarter, but we see this as manageable. We remain focused on executing our plan and creating long-term value for our investors, customers, communities and employees. Now let’s open the call to your questions.

Shar Pourreza:

Hey, good morning, guys.

Shar Pourreza:

Just a couple of ones here. We’re sort of thinking about the upcoming Ohio rate case. Just maybe from a high level, what sort of – what are the asks there? Is it primary capital and rate base, deferred costs, O&M true-ups? Do you sort of anticipate something to be more rate-neutral? And kind of related to that, how should we be thinking about historical precedents with sort of a newer commission as we think about some of the key regulatory items like goodwill and how that may be treated differently in this upcoming case?

Shar Pourreza:

Got it. And then lastly for me, just obviously, it’s impacting the stock a little bit this morning. Just in your queue there is some new language around potentially using hybrids. Can you just maybe expand on that, how it ties into your thinking around equity? Are you kind of looking at converts in the traditional sense or ones that have been utilized lately with some of your peers where the window to convert is shorter, it’s less dilutive, you don’t really get the equity credit? I guess, really, the question here is, are you looking for equity credit or not? Thanks.

Shar Pourreza:

Got it. So just to summarize your language around not needing equity has not changed to the plan?

Shar Pourreza:

Okay. Prefect. Thank you, guys. Appreciate it.

Jeremy Tonet:

Hi, good morning.

Jeremy Tonet:

Just want to come back to Signal Peak a little bit, if you could. Just wondering, I guess, beyond 2024, what’s the run rate EPS contribution? How should we think about that over time? And is there a strategic plan for the asset going forward?

Jeremy Tonet:

Got it. That’s helpful. Thanks for that. And then just wanted to kind of dive into weather, a little bit more, if I could. And clearly outlined before, I guess, offset to $0.38 pension headwind, but then weather is probably a bit more of an impact on the plan than when the guidance was originally provided. And you talked about, I guess, Signal Peak weather just load additional cost reduction opportunities and optimizing the finance plan to offset weather. But just wondering if you could quantify a little bit more how you’ve seen the weather impact versus plan for year-to-date or expectations at this point? And which of those buckets present kind of the bigger opportunities to deliver offsets?

Jeremy Tonet:

Got it. That’s helpful. So even if 2Q guidance was below, I guess, where The Street was, things are still kind of progressing in line with your expectations and these offsets can keep you firmly towards the midpoint of your plan?

Jeremy Tonet:

Got it. That’s helpful. I will leave it there. Thanks.

Steve Fleishman:

Yes. Hi, thanks. Good morning. John, maybe just – John, two Johns, Somerhalder, just a little more color on kind of the Board’s thoughts on hiring Brian and kind of what you think he brings to the company?

Steve Fleishman:

Okay. And just along those lines, there seems to be kind of – I know it’s kind of hard to speak for Brian, but just there is been some narrative that maybe Brian comes in and like rebases the plan. Just any thoughts on like is that unlikely, assuming people are thinking rebates lower when they say that?

Steve Fleishman:

Yes. And then just on the whole issue with the kind of thinking about – I’m sorry, just on the hybrid comment, I just wanted to just clarify that one more time. The – when you are thinking about optimizing the financing cost, this is more of like a hybrid that’s focused on a debt-like instrument like TPL and Southern and Allianz [ph] and a bunch of people have just done and not something that’s more equity focused?

Steve Fleishman:

Okay. Thank you.

David Arcaro:

Hi, good morning. Thanks for taking my question. Noticed that another phase of the New Jersey offshore wind transmission need was issued recently, and you had success in the first one. So I was wondering if you had any early read, if you could speak to your prospects for this next round of transmission need?

David Arcaro:

Got it. And on coal-driven earnings this year and on Signal Peak, I guess we’ve seen domestic coal prices notch down quite a bit since the beginning of the year. I was wondering if there is any view of a declining earnings contribution for this year, specifically versus what you had been originally contemplating in the guidance or do you have visibility into contracted levels that would potentially insulate you there?

John Somerhalder:

Yes. I mean there are – there is a fairly big disconnect between domestic coal prices in the U.S. compared to seaborne coal prices. And the good news is the first quarter came in very much in line with what our expectations were. And if you look at the forward curve, even though it’s coming down, it’s very much in line and supportive of what we have in our ‘24 and ‘25 plan. The real impact we see is this year, the prices because of the supply-demand fundamentals, milder conditions in Europe, fairly robust supply from some areas that supply Newcastle coal, Australia and others, the impact tends to be over the next several quarters where we see the impact. And as John said, that’s what we’re putting together plans to make sure we have other ways to address that and stay on track with our plan.

Jon Taylor:

Well, it was a very comprehensive report. We’re continuing to review the recommendations. I think we have an opportunity to provide feedback at some point down the road, and we will do that at the right time. But we’re going through the recommendations. I think there are many recommendations that we will accept, but there are probably some recommendations that we will need to have further discussion on.

Operator:

Thank you. Our next question is from Angie Storozynski with Seaport Global. Please proceed with your question.

Jon Taylor:

Well, I mean, Angie, I think through the first quarter, the pension has performed very well. I think the returns were 7%. The discount rate had come down about 20 basis points. And we are tracking to that level as we speak today. And so in the plan, we have pension, the pension kind of at the same level we have this year, and we are working to get trackers to protect the companies from volatility in the pension plan in New Jersey, in Maryland and we will likely propose something like that in West Virginia. So, we are doing what we can to protect customers as well as investors from the volatility in the pension plan. But based on everything we know today, everything is tracking a little bit better than we had anticipated.

John Somerhalder:

Yes. I think absolutely the latter. The Board strongly supports the plan. I mean we view this as – the most important thing is that we execute on the plan and continue to execute on the plan. I think our track record over the last year or 2 years related to the Brookfield first transaction, Jon talked about, the second transaction. What we have done related to even with supply chain issues, making sure that we are investing in our business and meeting our schedules on capital deployment. The Board really views that the steps we have taken to-date, the good progress we have made and continued execution on that plan is what will deliver the value and close that discount gap that you referenced. So, Board is firmly committed to that plan.

Operator:

Thank you. Our next question is from Sophie Karp with KeyBanc. Please proceed with your question.

Jon Taylor:

Well, I do think at some point down the road, we are going to look to consolidate our Ohio utilities just like we have proposed in Pennsylvania. The timing is a little bit to be determined. And so we are just working through that. But regardless of whether we propose to consolidate, you are still going to likely have three sets of rate books, right. And you will kind of get to parity within the tariffs over time. I think we have had other utilities in the state that have consolidated their entities as well as their rate books, and that took some time. The legal entity consolidation is one step, but then to consolidate from a rate perspective, probably takes several rate cases a few years, that type of thing. So, it is something that we are looking at and we will likely execute on, but the timing is a little bit to be determined.

John Somerhalder:

What we are committed to do is work very closely with the State of West Virginia with the commission. And they have instructed us to do this analysis. I mean we see this as – we all have an interest to make sure this is in the best interest of the customers in West Virginia, the State of West Virginia. And that because of the fact that the plant is a newer plant, has enhanced environmental controls, it’s a good question that needs to be evaluated. So, we see it as an appropriate thing to do. We do need to make sure it’s in the best interest of our customers and all. And so we see this as an opportunity to truly evaluate whether this is the right path forward. We are committed to work with the group or with all the stakeholders in West Virginia.

Operator:

Thank you. Our next question is from Mr. Gregg Orrill with UBS. Please proceed with your question.

Jon Taylor:

Hey Greg, this is Jon Taylor. Those audits have been stayed for another six-month period. I think that happened back in February. So, you are looking at the August timeframe where they could potentially start back up. But in between [Technical Difficulty] and then there is really nothing that we can do to resolve those or to continue with that work. It’s just really up to the commission who ordered the stay. And as soon as the stay is lifted, then we hope to get back to working to resolve those.

Operator:

Thank you. Our next question is from Mr. Julien Dumolin-Smith with Bank of America. Please proceed with your question.

Jon Taylor:

Yes. I mean so the facility optimization effort is probably a $0.02 run rate type of impact if you look at the lease cost, if you look at the maintenance costs, those types of expenses that we incur associated with the facility. So, it’s not a significant driver in the terms of the level of O&M that we spend, but it’s important. Those types of things add up. And with respect to your second question on Signal Peak, they will probably start hedging ‘24, I would say, later either this summer or early fall, which is consistent with their past practices. But at this point in time, that’s open.

John Somerhalder:

Yes. Julien, I don’t want to commit to a timeframe. Obviously, we want to get Brian on Board and get him ready to go with the plan and put his fingerprint on it. So, I am going to leave it as kind of a to-be-determined. But my sense is, we will give you that outlook at some point in time. But I just want Brian to come in and really get into the details of the plan and really try to drive where he wants to take the company going forward.

John Somerhalder:

Yes. If you look at the level of capital investment that is needed across the system, yes, I feel really good about the 6% to 8% long-term.

Operator:

Thank you. Our next question is from Anthony Crowdell with Mizuho. Please proceed with your question.

Jon Taylor:

Yes. So, the 5% when you have like extreme weather conditions like we saw in the first quarter, coming up with your – the weather impact and the weather adjusted impact, it’s a little bit more of an art than a science just because of the extreme circumstances. So – but what I would say is that the trends over the last few quarters and quite frankly, if you look at our performance over the last few years, the trends have been favorable relative to our forecast in the residential sector, increasing 1% to 3% depending on the month, depending on the time of year. So, that’s what we are seeing and that’s what we are kind of forecasting for the rest of this year.

Anthony Crowdell:

Is the industrial – and I guess I know that would be extreme weather in the, as Jon mentioned, are over science. Just a slight decline in industrial load, I think in your prepared remarks, was that more related to just one segment of the economy there?

Anthony Crowdell:

And then if I could switch gears on Slide 8 where you give us a walk-through and maybe a little different path in Julien’s question on the FE Forward to achieve. Just I think and you removed $0.05 of earning – of non-recurring earnings from GAAP to operating. Just how do we think about those charges as we work through the year? Is it likely that we continue to see those charges or do you think that one-time in nature, we don’t really see a repetition of that throughout ‘23?

Anthony Crowdell:

Great. Got it. Okay. Great. I will leave it there. Thanks for taking my questions.

Operator:

Thank you. Our next question is from Mr. Andrew Weisel with Scotiabank. Please proceed with your question.

Jon Taylor:

No, we definitely have a solid plan to get there by 2025. I think a lot of it depends on the level of proceeds that comes in from the FET sale initially. We have – we will see 50% of the proceeds that’s a minimum, but we could see more and put that money to work. And if we receive more of the money upfront, then there is a possibility we could be at that 14% level. If you net the receivable against the debt, we would absolutely be at 14%. But once we get the proceeds and put that to work, we will be in that 14% to 15% range.

Operator:

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

Irene Prezelj:

Thank you. Welcome to our fourth quarter and full year 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. We will also discuss certain non-GAAP financial measures. Reconciliations between non-GAAP financial measures, the presentation that supports today's 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 John Somerhalder, our Board Chair and Interim 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 John Somerhalder.

Jon Taylor:

Thanks, John, and good morning, everyone. Thank you for joining us. I joined John in thanking our employees for their incredible work this past year. Their perseverance and commitment made it possible for us to navigate challenging conditions and make important progress on our goals. We have a busy year ahead of us as we continue driving towards our aspirations and laying additional groundwork for our future success. I'll start my remarks with a review of our top regulatory and business priorities. Then we'll move to a discussion of 2022 financial results and 2023 expectations. We have an active regulatory calendar this year. Later this quarter, we'll file for new distribution rates in New Jersey and Maryland and file an application to consolidate our Pennsylvania legal entities. Then by midyear, we plan to file a rate case in West Virginia, an electric security plan in Ohio in an infrastructure investment program, or IIP in New Jersey. Broadly speaking, the rate cases will address the significant customer-focused investments we've made since our last rate cases in each of the states and provide an opportunity to bring our distribution equity returns in line with the industry average allowed returns. At the end of 2022, our weighted average ROE was 7.7% and while authorized ROEs ranged from 9.6% to 10.5%. Our current residential rates are 10% to 40% below our peers in the states we serve and we are sensitive to the pressures of the current inflationary environment on our customers. Our rate cases this year will ensure we maintain our affordability position while enhancing the customer experience, provide further support for low-income customers and support the critical investments for a more reliable, resilient and smarter electric grid. Each filing will address unique elements to better serve customers in that state. For example, the Maryland and New Jersey rate cases will highlight our plans to improve distribution reliability through incremental investments. In Maryland, we plan to file concurrently with the rate case for continuation of the electric distribution investment surcharge. And in New Jersey, our rate case will highlight our plan to file an infrastructure investment program by the middle of this year. These programs will focus on investments such as circuit resiliency and reliability, feeder sectionalization and distribution automation and substation upgrades. In West Virginia, the rate case will reflect our recently filed proposal with the commission to update depreciation rates associated with Mon Power's II coal-fired generation assets, which based on the depreciation study, would have retirement dates of 2035 and 2040. Any increase in depreciation rates would not take effect until conclusion of the upcoming base rate case. Turning to consolidation of our four Pennsylvania utilities, this is an important step to align with our new state operating model, simplify our legal entity structure and increase the flexibility and efficiency of our financing strategy. This consolidation won't represent any changes in current electric rates for our Pennsylvania customers. Those will be combined as appropriate over time through future rate case activity. In Ohio, our ESP V will adjust generation procurement for non-shopping customers after the current ESP expires in May of next year. In addition, this filing will address other regulatory programs and mechanisms such as continuation of existing capital writers such as the DCR and AI. And as we extend our commitment to have a broad stakeholder dialogue, we are considering programs that support energy efficiency, low income and additional customer-related initiatives. We also look forward to advancing the $626 million Ohio grid mod Phase 2 capital investment plan, which was filed last July. If approved by the commission, grid mod will continue our work to enhance the delivery of safe, reliable power, offer modern customer experiences and support emerging technologies. As we make each major regulatory filing, we'll post a convenient and comprehensive summary to our IR website. You'll find this information on the Investor Materials page of the site and a new section named regulatory corner. Turning to financial matters. Our recent agreement with Brookfield represents an excited milestone in our progress to be a premier utility with a strong financial position and sustainable long-term growth. The $3.5 billion transaction will deliver highly attractive, efficient equity financing. The transaction is structured with a $1.75 billion due at closing and aligned with our investment and financing plans an 18-month $1.75 billion note at 5.75% interest. Once the transaction closes, we intend to deploy the proceeds to further improve our credit metrics and our balance sheet targeting FFO to debt metrics of 14% to 15%. The proceeds also supported more than 10% increase in our 2024 and 2025 capital investment plans. We're using nearly $1 billion into the CapEx plan, brining our target to approximately $18 billion over the 2021 to '25 period. Through this plan, we're targeting 75% formula rate investments and more than 7% average annual rate base growth beginning in 2024. We will use NOLs and existing tax credits to offset most of the taxable gain on the transaction, resulting in an expected cash taxes of approximately $50 million. Beginning in 2023 and moving forward, we expect to be a federal cash taxpayer at approximately $200 million annually. Our agreement to sell an additional 30% interest in FET triggered a deferred gain on the prior 19.9% sale that was completed in 2022. We As a result, we recognized a $752 million non-cash charge in our fourth quarter '22 GAAP results. Operating earnings were $0.50 per share for the fourth quarter of 2022 and on an adjusted basis, excluding unique drivers this year, which include the impact of accounting changes, rate credits provided to Ohio customers and equity financing transactions. Fourth quarter operating earnings increased $0.09 per share or 22% compared to the same period in 2021. In our distribution business, fourth quarter results benefited from weather-related demand, along with the impact of our capital investment programs. These results nearly offset higher operating expenses, primarily associated with accelerating certain planned maintenance work, incremental reliability activities and higher material and storm costs. Total distribution deliveries increased 2%, resulting from weather that was closer to historic norms compared to the very mild fourth quarter of 2021 and increased demand from industrial customers. Residential sales increased 3% from the fourth quarter of 2021, but decreased slightly on a weather-adjusted basis. Consistent with our observations on the October call, sales to residential customers remain about 3% higher than pre-pandemic levels. In the commercial sector, fourth quarter deliveries were up slightly from the prior year due to weather and decreased almost 2% on a weather-adjusted basis. While sales to commercial customers increased slightly overall in 2022, they continue to lag 2019 levels by more than 4%. Finally, sales to industrial customers increased nearly 2% compared to the fourth quarter of 2021, led by continued recovery in the automotive, mining, fabricated metals and steel sectors. Overall, industrial sales are trending closer to pre-pandemic levels with full year 2022 sales less than 1% below 2019 and fourth quarter 2022 sales flat to 2019 levels. In our transmission business, fourth quarter results benefited from continued formula rate base growth of 9% year-over-year associated with our Energizing the Future investment program as well as lower financing costs. I want to take a quick second to recognize our transmission, supply chain and materials operations teams, who overcame significant supply chain and other issues in 2022, investing nearly $1.4 billion in projects to improve grid reliability and resiliency. For example, we successfully completed the first segment of a 64-mile transmission line rebuild that will enhance service reliability for customers in Eastern Ohio. And in Central New Jersey, construction is only on two projects that will upgrade 19 miles of transmission lines and benefit 50,000 customers. In 2023, our transmission investment plan is $1.7 billion, and we have a long project pipeline ahead of us in this premium business. And finally, our corporate segment benefited from higher investment earnings from the Signal Peak mining operation and lower financing costs associated with the holding company debt redemptions earlier this year. For the full year, we reported GAAP earnings of $0.71 per share, largely reflecting the non-cash tax charge I mentioned earlier. Full year 2022 operating earnings were $2.41 per share, slightly above the midpoint of our guidance. Again, on an adjusted basis, excluding the accounting changes, Ohio rate credits and equity transactions, we achieved a $0.26 improvement in operating earnings compared to 2021, which represents 12% year-over-year growth. Our solid financial performance resulted in $2.7 billion in cash from operations last year, which is in line with our expectations, and we made more than $3.2 billion in customer-focused regulated investments and plan to execute our 2023 capital investment plan of $3.4 billion. And we met our 2022 FFO to debt target, executed our financing plan and achieved investment-grade credit ratings with Fitch and just recently received a positive outlook from S&P. The materials posted to our website yesterday afternoon contain an updated financial outlook through 2025, including our capital plan, load forecast and financing plan. It's our expectation that we will extend our outlook beyond 2025 later this year. As John mentioned, our 2023 earnings guidance of $2.44 to $2.64 per share reflects overcoming the enormous challenge we face related to the pension, which year-over-year was a $0.38 impact to our 2023 plan. The combination of accelerating O&M into 2022 together with lower interest expense resulting from debt reductions and earnings from Signal support our projection for 6% growth year-over-year at the guidance midpoint. Our focus is executing on our plan to drive strong regulated earnings growth, resulting in our long-term 6% to 8% growth outlook, anchored by increasing transmission and distribution utility investments. While pension and the positive offset provided in the near term by Signal Peak have complicated our earnings story, we are laser-focused as a management team to improve the earnings quality over time by replacing earnings from the Signal Peak and pension with high-quality core T&D earnings growth and the significant benefits associated with improving our balance sheet. In terms of other 2023 drivers, our expectation is for the continued strong growth from the investments we're making for our 6 million customers in our distribution and transmission businesses and an improvement in our cost structure, driven in part by the work we accelerated into 2022, but this is certainly an area we will need to keep an eye on with respect to inflationary pressures. And ending on another positive note, we are fresh off a recent Board meeting, where we discuss the importance of the dividend to our investors. The Board approved a new dividend policy that raises our targeted payout ratio to 60% to 70% up from 55% to 65% previously. And we also expect to resume dividend growth subject to Board approval for dividends payable late this year. Our new payout ratio is more in line with our peers, and reflects the steps we've taken to improve our credit profile and our commitment to enhancing value for investors. And as I mentioned on Friday, S&P moved First Energy to a positive outlook based on the announcement of the asset sale and our strategy to use those proceeds in a credit supportive manner. We're pleased with this action, which recognize our work to deliver on our commitments. I'm excited about our plans for this year and for the future. We've taken significant steps over the past few years in a broad range of areas to move the Company forward from the cultural changes, the improvement of our financial and credit profile and the execution on our regulatory strategy focused on benefiting our customers. We feel like we have great momentum for the future focused on delivering value for our customers, shareholders and all of our stakeholders. As always, thank you for your time and your interest in FirstEnergy. Before we take your questions, I'm going to turn the call back over to John.

Operator:

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Nick Campanella with Credit Suisse. Please proceed with your question.

John Somerhalder:

Yes. Thanks Nick. Consistent with what we've talked about earlier, which is not only the criteria, what we're looking for, and we talked about that as part of the prepared remarks, the time line that we talked about three to six months. Everything we're viewing now is still consistent with that. I can tell you that we've had quite a bit of activity related to the Board search process so far this year. It's been very active and that continues as we speak right now. I think a couple of positives are that because we've continued to execute as a company, we see good progress, and that's what we indicated that even though we were going through the CEO search process that we continue to execute on things like the FET transactions, that's been a very positive. Also, the Board has been very focused on getting the right individual. But saying that, we do realize that we want to address this issue, the Board has a high priority right now and is very active on concluding the search.

Jon Taylor:

Nick, this is John Taylor. So let me maybe take a few minutes to kind of explain how we're thinking about the long term. So if you think about 2023 ex pension and ex-Signal Peak, there's going to be obviously significant improvement in the earnings year-over-year of the business, mainly because of the actions that we took last year to accelerate maintenance expenses and the plans that we put in place for additional cost controls this year. The interest expense benefits from improving the balance sheet as the holding company as well as continued growth in our transmission business. And those items more than offset the decline in Signal Peak and pension that was close to 30% of our earnings in 2022. And now for this year is projected to be about 15% of our earnings in 2023. So, if I think about the plan going forward, I think what you'll see is above-average growth from the business ex-pension, ex-Signal Peak from new base rates and formula program capital spend in our distribution companies, the continued organic growth from our transmission business and then how we're going to deploy the proceeds in an EPS accretive way from the FET transaction. And so our current plan, pension Signal Peak is going to be less of a contribution in those outer years, representing probably around 10% of the total earnings of the Company. So obviously, what's going to be important for us is regulatory outcomes, cost control is going to be very important. And that, along with our transmission business continuing to drive significant year-over-year earnings will drive the overall growth of the Company.

Andy Storozynski:

So just wanted to ask about the CEO search. So John, I think you mentioned that there's an expectation from the Board that the new appointee is going to stick with the current strategy. So does that mean that we shouldn't expect any changes to your EPS growth target, at least 25% by the new CEO?

Andy Storozynski:

Okay. And then the other, John, the -- I'm just wondering if you have any expectations for the ESP and then the distribution case in Ohio, given the backdrop in the state and then ongoing investigations related to HP 6? I mean, -- is -- how do you think about the potential earnings impacts related to those two proceedings?

Andy Storozynski:

Okay. And lastly, I mean, if I understand correctly, you are growing the dividend, maybe as soon as the midyear, maybe a little bit later. So when you talk about the FFO to debt targets, those already account for the fact that the dividend will start growing.

Operator:

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

Jon Taylor:

Yes. Go ahead, Steve. Finish up.

Jon Taylor:

Right, right. So I mean, if you just look at the cases that we'll file next year, New -- or excuse me, this year, New Jersey, West Virginia, Maryland, all of them, except for Maryland, have fairly low return on equity. So New Jersey 7%, West Virginia, 6.6%, we're also filing for capital programs in the distribution business with the grid mod program in Ohio, we're going to file for an IIP in New Jersey. So, all of that will provide significant growth to the distribution business. You know about the transmission company and the robustness of that business and then how we deploy the proceeds into the balance sheet from the FET transaction will reduce otherwise incurred interest expense. And so as we look at the business ex-pension, ex-Signal Peak, you'll see above-average growth.

John Somerhalder:

Yes. The requirements, what we're looking for, Steve, are very consistent with what we've talked about. We have not changed that. As we've said, we've had good interest from individuals that have that. What I can tell you, consistent with what we've said earlier is, the Board truly supports and believes in the plan, and we are really focused on finding the right CEO that can execute on that plan. So, that is the path that the Board is headed down.

James Ward:

It's James Ward on for Shar. How are you?

James Ward:

Hi, doing well. Thank you for taking my question. We're glad to see in the slides that the 6% to 8% annual growth rate target continued beyond 2025, the recently announced FET transaction obviously gives you a lot of flexibility in terms of deploying capital, as you mentioned, either towards rate base growth or debt repayment, both of which yield recurring benefits to earnings. But specifically on the investment side, you've highlighted the step-up in annual rate base growth from 6% to 7% in '24 and '25, is 7% just 24% and 25% expectation or like the 6% to 8% annual EPS target continuing post 2025, should we be assuming that 7% rate base growth also applies annually post '25? Just trying to make sure we're thinking correctly about the drivers of earnings in that period, even though you're not officially guiding beyond '25 in terms of a capital plan at this point in time? Just high level.

Operator:

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

John Somerhalder:

Yes, David, the Pleasants plant has some improved environmental controls compared to at least one of our facilities. And the commission in West Virginia has asked us to look at -- could it make sense to continue to operate that plant as part of the generation that we would own to support our customer load. We are consistent with what we've been asked by the commission. We are evaluating that at this time. And I think we'll have some results in late March that will inform that decision. West Virginia and the load for the customers and the economy there are keen interest. So, we will work hard to see if that could make sense, but I can't prejudge at this time what the result may be. But we will comply with what we're asked to do there and do a good faith analysis to see if that could make sense. And we'll be able to let you know as we conclude that what the next steps could be or what additional steps the commission may take to further evaluate that depending on the evaluation.

Jon Taylor:

Yes, David. So if you think about just year-over-year, the $0.38, I would say probably 25% of that is coming from OpEx that we accelerated from '23 into '22, our financing plan, which would be permanent the debt tender as well as the open market repurchases that we executed in the back half of last year. Signal Peak is a contribution to the $0.38 offset and then some other, what I'll call, cost initiatives and other benefits that we're driving towards -- round out the difference. There is some timing or some of those benefits that aren't necessarily sustainable into the future, but we are trying to put in programs and controls in place to continue to drive out costs throughout the entire organization. So that's kind of the way that we're thinking about it at this point in time.

Julien Dumoulin-Smith:

Listen, just coming back to the rate base growth question. Just I wanted to understand a little bit more how to think about the net rate base growth relative to the 7% growth disclosed. And how do you think about that accelerating here? I know you said in your comments, you expect to revisit some of the growth later this year potentially. But just to understand like what the baseline is in terms of like net growth back to yourself from rate base and how that might accelerate here just to reconcile the core 6% to 8%? Or alternatively, how much of the outlook when you think about the 6% to 8% is driven by some of the under-earning improvement that you alluded to earlier.

Julien Dumoulin-Smith:

And just to clarify, when you're ready, that's the event later this year that you're alluding to? And then related to that, just the rate base growth, that 7%, what's the delta that's not owned in terms of the FET sell-down? Just to clarify that as a baseline.

John Somerhalder:

Yes, that's a different 30%. If we sell off 30% additional plus the 19.9% represents about 30% of our total transmission. So the math works just like John indicated, but two different 30%s.

Jon Taylor:

I mean, Julien, it's hard to tell you exactly what the outlook is going to -- I mean, what we're going to provide you. I think, we are going to extend the outlook, and we'll provide the normal detail that we typically provide when we extend the outlook. But I would just ask that we just kind of wait to see -- wait until that time, and then we can provide you all the detail.

Sophie Karp:

All of my questions have been answered, but maybe I can ask you a high-level question here. So your stated rate base growth and your EPS growth targets are consistent with what your peers -- some of your peers also forecast in much higher growing jurisdictions, right? And so Ohio, Pennsylvania, jurisdictions where you guys operate are not really characterized by higher population growth. And so with that in mind, how do you feel about build pressure going forward, considering that you will not have that tailwind of growing population and necessarily to help spread the pain, right? So how do you think about that? And what supports that growth on the ground? Maybe you can comment about local economy, something that maybe we are missing.

Sophie Karp:

Got it. And then if I may, on Signal Peak, what is -- maybe if you can reiterate what is your kind of exit path here? Do you plan to can sell it? Or is it just going to naturally diminish in your earnings profile over time? And if you are planning to sell it, could you just remind us what the book value of it is and if there's a possibility of impairment and the balance sheet impact?

Operator:

Thank you. Our next question comes from the line of Anthony Crowdell with Mizuho Securities. Please proceed with your question.

Jon Taylor:

So, it represents about 15% of the total earnings of the $2.54 midpoint.

Jon Taylor:

Yes. So, I think if you look at our plan, we're trying to ramp up our formula rate CapEx at about 75% overall 100% of the capital in the transmission business is formula rate, and I think we're targeting 50% by the time we get out to '25 in the distribution business. So a fairly significant amount of formula rate CapEx in the plan.

John Somerhalder:

I wasn't expecting that question. My thoughts are we have strong interest. So my thoughts are that we're focused on concluding that and transitioning me back to the Board as what my thoughts are.

John Somerhalder:

Thank you, and thank you all for joining us today. We very much appreciate your interest in and support of FirstEnergy. Thank you.

Irene Prezelj:

Thank you. Welcome to our Third Quarter 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. We will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures, the presentation that support today's discussion and other detailed information about the quarter and year-to-date 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 John Somerhalder, our Board Chair and Interim 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 John Somerhalder.

Jon Taylor:

Thanks, John, and good morning, everyone. I'm glad you can join us for today's call. We continue to execute on our strategies as we drive strong operational and financial performance. I'll start my remarks with a review of some regulatory and business updates, then we'll move to a discussion of financial results and expectations. Starting in Ohio, we are nearing completion of the first phase of our grid modernization program, which began in 2019 and included installing more than 700,000 smart meters with supporting communications and data management systems and voltage regulating and distribution automation equipment on over 200 circuits to help provide our customers with enhanced reliability and power quality along with greater visibility into their electric usage. We continue this successful work. In July of this year, we filed for our grid modernization Phase 2, a 4-year $626 million capital investment program, that proposes to deploy an additional 700,000 smart meters, distribution automation equipment on nearly 240 circuits and voltage-regulating equipment on nearly 220 circuits. It also includes pilot programs related to electric vehicle charging and battery storage. Together, these programs are designed to enhance the delivery of safe, reliable power while offering our customers modern experiences, emerging technologies and opportunities to help lower their bills. In West Virginia, the Public Service Commission approved a settlement agreement for environmental compliance projects at the Fort Martin and Harris power stations to meet the U.S. EPA's current affluent limitation guidelines required to operate both plants beyond 2028 as well as a surcharge to recover the expected $142 million of capital investment along with annual operation and maintenance expenses. We currently expect to complete this construction by the end of 2025. These projects allow us to responsibly operate these power plants for the benefit of our customers in the state through 2035 and 2040 as we continue to support a timely and clean energy transition. At the same time, we continue securing commitments from residential, commercial and industrial customers in West Virginia to purchase solar RECs from our 5 planned utility scale solar generation facilities totaling 50 megawatts. As part of the conditional approval by the West Virginia Public Service Commission, Mon Power is required to obtain subscriptions for at least 85% of the facilities prior to filing for final approval. The customer response has been favorable, and we expect to reach the 85% threshold before the end of the year. Our expectation is that our first solar generation site will be in service in 2023, with others to follow by 2025 at a total investment of approximately $100 million. This progress coupled with other regulatory outcomes this year around smart meter and electric vehicle programs in New Jersey go a long way in executing on our strategy to improve the customer experience through investments that modernize the grid and support the energy transition. As we think about the future, we are preparing for an active regulatory calendar in '23 and '24. We've planned rate case filings in New Jersey, Maryland and West Virginia, all in the first half of 2023. For JCP&L, we last filed a case in 2020, and for West Virginia and Maryland, our last base rate case was filed in 2014 and 2018, respectively. The planned rate cases will primarily address our lower equity returns, as highlighted in the presentation, which are the result of the significant capital investments we have made since our last rate case and changes in operating expenses, and include the accounting changes that we have previously discussed, such as vegetation management and corporate support costs. In addition, the New Jersey rate case would address our smart meter and electric vehicle programs. The Maryland case would address our electric distribution infrastructure investment and EV program. And in West Virginia, we plan to file for new depreciation rates resulting from a depreciation case to be submitted later this year. Also, as you recall, our existing Ohio Electric Security Plan expires on May 31, 2024. Thus, we plan to file a new ESP in the first half of 2023, which will include a proposal around our generation procurement plan. And ESP also provides an opportunity for provisions regarding distribution service such as capital recovery riders as well as additional programs that can provide benefits to our customers, such as energy efficiency. In the months ahead, we intend to engage Ohio stakeholders in a discussion about our proposed ESP V. As we've mentioned on previous calls, we have been considering the potential consolidation of our Pennsylvania and Ohio operating companies into 2 state utilities. While we continue to evaluate our options in terms of timing for a potential Ohio consolidation, we expect to file an application in Pennsylvania within the next 6 months. Consolidating these utilities will align with our 5-state operating model, simplify our legal entity structure and increase the flexibility and efficiency of our financing needs. In 2024, we are required to file a base rate case for our Ohio utilities and we are beginning to explore the option of filing a rate case in Pennsylvania at some point within our current planning cycle. Finally, in these regulatory filings, we plan to address recovery of regulatory asset balances, such as deferred storm costs, which currently amount to approximately $680 million across all of our jurisdictions. In September, Ohio Edison issued $300 million of 10-year notes at 5.5%. And we have one more transaction to complete this year at West Penn Power as we continue executing our debt financing plan. While interest rates have increased, interest expense remains manageable through 2024 as our new money requirements are minimal, and our debt maturities over this same period have higher coupons averaging near 5%. Additionally, filing for new base distribution rates in all of our jurisdictions over the near term allow us an opportunity to address the increased cost of debt. We remain focused on improving the credit profile of the company. During the third quarter, we repurchased approximately $140 million of holding company debt in the open market, bringing our total holding company debt reduction to $2.5 billion this year, which is more than a 30% reduction from the end of 2021. Also, as John mentioned, we are pursuing the sale of additional minority stake in one of our distribution or transmission businesses. This would follow our very successful transaction with Brookfield Super-Core Infrastructure Partners for a 19.9% interest in FirstEnergy Transmission LLC that was completed in May of this year at a 40x PE multiple or 3x rate base for approximately $2.4 billion. While we don't have any additional details at this time regarding a proposed transaction, we remain focused on accelerating our balance sheet improvement efforts in a cost-effective manner with a goal of achieving 14% to 15% FFO to debt much sooner than originally planned. We had a robust discussion about the pension during our second quarter call and our approach has not changed. Extreme volatility in both interest rates and global equity markets continue. The discount rate that measures our pension obligation increased from 3% at the end of 2021 to approximately 5.5% as of September 30, while asset losses and our qualified pension trust were approximately 22% through the same date. Despite the asset performance, our net qualified pension obligation improved over $400 million from 2021 to approximately $1.6 billion at the end of the third quarter with the plan's funded status at 81%. The potential 2023 EPS headwind from the qualified pension plan has increased from $0.30 as of June to approximately $0.45 as of September 30. As we communicated in July, we are confident in our mitigation plan to address the $0.30. This includes costs we have already begun accelerating into 2022, the benefits from our balance sheet improvement efforts, specifically the $1 billion of high coupon debt that we retired in June and the expected uplift from other corporate cost reductions and earnings from our legacy investment in the Signal Peak mining operation. We will also continue contemplating longer-term regulatory approaches to moderate the impact of market volatility on our pension plan, and we would look for additional offsets if the outcome as of December 31 exceeds $0.30. While an impact larger than $0.30 would affect 2023 earnings, we don't plan to pursue shortsighted gains that could take us off track for the future. Our solid and sustainable investment pipeline focused on providing reliable service to customers continues to firmly support our long-term plan for 6% to 8% growth. Our focus remains on controlling what we can control and creating value over the long term through regulated investments, operational and financial discipline and an improved credit profile. Our financial performance this quarter speaks to the continued resiliency of our business. Third quarter GAAP earnings were $0.58 per share and operating earnings were $0.79 per share, near the top of our guidance range. GAAP results primarily reflect a onetime charge as a result of implementing recommendations from the FERC audit, which covered the period going back to 2015 and resulted in certain write-offs and expected refunds. On a proforma basis, excluding the impact of accounting changes, rate credits provided to Ohio customers and equity financing transactions, which are all unique drivers this year, our third quarter operating earnings increased $0.11 per share or 16% compared to the same period in 2021. On a year-to-date basis, we reported GAAP earnings of $1.42 per share and operating earnings of $1.91 per share. Again, on a pro forma basis, adjusting for the accounting changes, the Ohio rate credits and equity transactions, we achieved a $0.17 improvement in operating earnings compared to the first 9 months of 2021 or nearly 10% year-over-year growth. Third quarter results in our distribution business benefited from higher weather-related demand, the positive impact of our capital investment programs and lower financing costs. These benefits offset higher operating expenses associated with accelerating future planned maintenance work from 2023 into 2022 and higher material costs. Total and weather-adjusted distribution deliveries were essentially flat compared to the third quarter of 2021. Warmer summer weather and stronger demand from industrial customers, reflecting the continued rebound in many industrial sectors within our service territory, was partially offset by lower year-over-year weather-adjusted residential usage. Residential sales decreased 1% from the third quarter of 2021 and a little less than 2% on a weather-adjusted basis. However, sales to residential customers remain higher than pre-pandemic levels by nearly 3% on a trailing 12-month basis, reflecting a permanent structural shift in this high-margin customer class. Deliveries to commercial customers decreased 1% or close to 2% on a weather-adjusted basis. And sales to industrial customers increased approximately 2%, led by growth in fabricated metals, automotive, food manufacturing, education services and plastic and rubber. Third quarter industrial sales were down approximately 1% compared to pre-pandemic sales. In our transmission business, third quarter results primarily benefited from continued formula rate base growth associated with our Energizing the Future investment program and lower financing costs. Our ongoing investments in this important program have added more than $0.5 billion in additional rate base since the third quarter of 2021. Key projects currently underway include replacing more than 1,100 insulators along a 68-mile transmission line corridor in Northeast Ohio to ensure power reliability and resilience, a new substation in Ashland County, Ohio, to meet the area's future energy demands and supporting economic growth, and planning for a new high-voltage substation to support a data center campus that is under development in Frederick, Maryland. And finally, our corporate segment benefited from higher investment earnings from the Signal Peak mining operation and lower financing costs primarily related to our holding company debt redemptions throughout the year. With our strong results so far this year and our outlook for the next 2 months, assuming normal weather, we expect 2022 operating earnings at the top half of our guidance range. Additionally, we are on track to meet our cash from operations target of $2.6 billion to $3 billion this year, and improve operating cash flow consistent with earnings over time. In mid-February, along with announcing our fourth quarter and full year 2022 results, we plan to provide you with 2023 guidance, along with updated capital and other plans to support our future growth. I too am proud of our progress to revitalize our culture, optimize our performance and improve our financial profile. We are energized by our transformation and look forward to taking the next steps to become a premium utility. Now I'll open the line to your questions. As always, I appreciate your time and your interest in FirstEnergy.

Shahriar Pourreza:

Jon, just -- I guess, just given some of the pressures we've seen with inflation and interest rates, I guess, how much of the $0.30 of pension headwind that you previously disclosed have you sort of been able to offset to date with some of the O&M and financing moves you've done recently, especially as we're layering in Signal Peak, which essentially is printing money given sort of the coal price moves. And just on the incremental $0.15, you mentioned, obviously, you're looking at additional offsetting opportunities. What could those be?

Shahriar Pourreza:

Got it. Got it. And then just maybe a strategic question and maybe a little bit more theoretical. Just on asset optimization. Obviously, it's been a bit more challenging doing deals at this kind of like an interest rate environment. The buyer pool, I would think has shrunk a little bit. Are you still only open to selling a minority stake of, let's say, Pennsylvania, or could we see -- could we see you make -- could it make more sense kind of in this environment to look at an entire opco, which could actually expand the buyer pool to bring in more strategic versus just financial players. Obviously, some utilities are waiting for assets right now, but not sure they want a small stake in one.

Jon Taylor:

Yes, I would agree. I mean, when we made the announcement in September, we had several inbounds from financial players showing strong interest in either a transmission or distribution business. We've had some conversations with several parties, and the interest continues to be strong. So we're continuing to work the process internally, and hopefully, we can get into a position where we can make an announcement either late this year or the first part of next year.

Steven Fleishman:

So just for Jon Taylor, the pension, I know you probably don't want to get into marking pension every day, but the market's back to Q2 levels and I think it's up almost 8% this month. So if you -- and I know bond market's still weakened further. But just overall, if you kind of update it to roughly where things are now, where would you be relative to that $0.30 or the $0.45?

Steven Fleishman:

Okay. Great. And then on the CEO, the comments on -- that you made, John Somerhalder, on just what you're looking for in a CEO. I mean, those sound all great. And I guess the real question is, what's your conviction that you can find somebody and who comp -- that meet all these credentials from what you've kind of seen so far?

Steven Fleishman:

Okay. That's good. And then lastly, just on the continued balance sheet progress. Any sense from the standpoint of the rating agencies on the potential for getting upgraded to investment grade, either late this year, by the end of the year, I guess, Jon?

Operator:

Our next question is come from the line of David Arcaro with Morgan Stanley.

Jon Taylor:

Yes. So Dave, I think for us to -- I don't know if we were to try to sell the pension obligation, I mean, given its funded status, that might be a little bit of a challenge to offload that obligation to like an insurance company or something like that. So I'm not sure that would be something that we would pursue. With respect to regulatory mechanisms as we file base distribution cases over the course of the next couple or 3 years, we will absolutely look at ways that we can limit volatility exposure in the pension plan at our regulated companies. So that is something that is definitely on the table at this point in time.