Yahoo Finance FirstEnergy Corp. (NYSE:FE) Q1 2024 Earnings Call Transcript
FirstEnergy Corp. (NYSE:FE) Q1 2024 Earnings Call Transcript April 26, 2024
FirstEnergy Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the FirstEnergy Corp. First Quarter 2024 Earnings Conference Call [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Irene Prezelj, Vice President, Investor Relations and Communications. Please go ahead, Irene.
Irene Prezelj: Thank you. Good morning, everyone. And welcome to FirstEnergy’s first quarter 2024 earnings review. Our President and Chief Executive Officer, Brian Tierney, will lead our call today and he will be joined by Jon Taylor, our Senior Vice President and Chief Financial Officer. Our earnings release, presentation slides and related financial information are available on our Web site 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 those statements can be found in our SEC filings. The appendix of today’s presentation includes supplemental information, along with the reconciliation of non-GAAP financial measures. Now, it’s my pleasure to turn the call over to Brian.
Brian Tierney: Thank you, Irene. Good morning, everyone. Thank you for joining us today and for your interest in FirstEnergy. This morning, I will review financial performance and highlights for the first quarter, provide some updates on key regulatory developments and review FirstEnergy's shareholder value proposition. For the first quarter, FirstEnergy delivered GAAP earnings of $0.44 per share compared to $0.51 per share in 2023. Operating earnings were $0.55 per share, $0.02 higher than the midpoint of guidance for the quarter versus $0.60 per share last year. It is important to note that higher revenues from investments to better serve our customers and more favorable weather compared to last year were offset by higher planned O&M expenses and the expected decrease in Signal Peak earnings resulted in higher quality utility earnings for the quarter.
Jon will provide additional details later in the call. During the last earnings call, we announced our five year $26 billion investment program to better serve our customers, branded as Energize 365. That plan, combined with our ongoing regulatory updates and our continuous improvement program, give us the confidence to affirm our 6% to 8% long term operating growth rate. We are also affirming our operating earnings guidance range of $2.61 to $2.81 per share for 2024. We are providing guidance of $0.50 to $0.60 per share for the second quarter of this year. Our confidence in the future gave us the opportunity to increase our dividend again to $0.425 per share payable in June. On an annual basis, this would represent an increase of 6.25% versus dividends declared in 2023.
We are continuing to make progress on recruiting and hiring executives to run our five primary businesses. We expect to make announcements in the near term. Earlier this month, we announced the hiring of John Combs as our Senior Vice President of Shared Services. John was most recently an SVP and Chief Technology Officer at JPMorgan Chase. John's deep background in technology and leadership, as well as his financial acumen make him the perfect person to lead our IT, supply chain, flight operations and corporate and cybersecurity organizations. We are thrilled to welcome John to the team. On March 25th, FirstEnergy closed on the final phase of our multiyear $7 billion equity raise to improve our balance sheet and fuel our growth. We received $2.3 billion of the $3.5 billion proceeds with the balance in interest bearing notes that are expected to be repaid this year.
We are excited to have Brookfield as our partner in the fast growing transmission segment of our business. The impact of this transaction on FirstEnergy as the final phase of the $7 billion equity raise cannot be overstated. The total equity on the balance sheet increased 25% in the three months ended March 31st, that's truly remarkable for a company of FirstEnergy size. For the first time in this company's history, we are fully regulated, mostly wires with a strong balance sheet that enables organic investment in our utility companies to improve reliability and our customers' experience. Following the closing of the transaction, Moody's recognized the impact of the company by upgrading FirstEnergy Corp. senior unsecured rating to investment grade.
On Tuesday, S&P upgraded FirstEnergy's corporate credit rating to BBB and our senior unsecured rating to investment grade with a positive outlook. The balance sheet strength and clean business model represented on this slide capture a lot about what excited me to come to FirstEnergy. Let me provide some updates on key regulatory initiatives. People have asked us how they will know when we are making progress on our regulatory plan. I tell them to look for milestones where we are getting fair and reasonable regulatory outcomes. During the quarter, we proved that we can obtain constructive regulatory outcomes across our jurisdictions. We received approval of our rate case settlement in New Jersey authorizing a 9.6% ROE and a 52% equity capitalization ratio.
Even with this increase, JCP&L's rates remain 26% below our in state peers. The West Virginia Public Service Commission approved constructive depreciation and base rate case settlements. In addition, they approved an expanded net energy fuel charge settlement for recovery of about $0.25 billion through 2026 with no disallowances. For investors looking for milestones that FirstEnergy can obtain fair and reasonable regulatory outcomes, we provided several examples during the quarter. Jon will provide additional detail on the results in his remarks. For the balance of the year, we have an active regulatory schedule. In Ohio, we filed a settlement in our GRID Mod II case asking for the opportunity to complete our advanced meter infrastructure rollout over four years.
A hearing is scheduled for June 5th. Approval of this noncontroversial settlement will bring us to parity with our in state peers. We are expecting approval of our ESP V filing this quarter and we will file a base rate case next month. That case will seek a modest increase in base rates but will reset a number of riders since the last base rate case. Earlier this month, in Pennsylvania, we filed a base rate case requesting an 11.3% ROE and a 53.8% equity ratio. We expect the decision in December with rates effective in January of next year. Before I turn the call over to Jon, I would like to highlight the value proposition that FirstEnergy offers to shareholders. We have completed the multiyear overhaul of our balance sheet and have achieved investment grade status at both Moody's and S&P.
Our strong balance sheet differentiates FirstEnergy from many of our industry peers and that we do not anticipate incremental equity needs to fund our $26 billion investment plan. Our long term annual operating earnings growth rate combined with our dividend yield represent a total shareholder return potential of 10% to 12%. Our earnings quality is vastly improved driven by growth in our core regulated businesses, and our customers' affordability remains strong throughout the investment period. At the end of a significant business transition led by our Board of Directors and management team, FirstEnergy represents a high quality and attractive risk value proposition to our shareholders. With that, I will turn the call over to Jon.
Jon Taylor: Thank you, Brian. And good morning, everyone. Despite another mild winter, we are off to a good start this year with strong execution and financial discipline from our team that resulted in operating earnings above the midpoint of our guidance. And we are reaffirming our full year operating earnings guidance range of $2.61 to $2.81 a share, which represents a 7% increase versus the midpoint of our 2023 guidance. Today, I'll review financial performance for the quarter, our progress on key strategic regulatory initiatives and close with some details around the balance sheet. Looking at our financial performance for the quarter. Operating earnings were $0.55 a share, which is above the midpoint of our guidance despite the mild temperatures this winter that impacted retail sales and includes a planned increase in operating expenses as discussed on the fourth quarter call.
This compares to 2023 first quarter operating earnings of $0.60 a share. As we also mentioned on the fourth quarter call, earnings growth this year will be back end loaded, given the effective dates of rate cases in West Virginia and New Jersey and planned increases in operating expenses in the first half of this year associated with the timing of maintenance work. Our first quarter results are detailed in the strategic and financial highlights document we posted to our IR Web site last night. At a consolidated level, first quarter earnings of $0.55 per share were impacted by higher planned operating expenses and improved earnings quality from an expected decrease in earnings from Signal Peak, partially offset by increases from new base rates and rate base growth in formula rate programs.
And although customer demand was not a significant driver year-over-year given the mild winter in the first quarter of 2023, retail sales were down 6% versus planned, primarily associated with heating degree days that were 14% below normal, impacting results by $0.07 a share versus our plan. Let's also take a few minutes to review our segment results, which you will notice in our filings and presentation the segment reporting change consistent with how we're managing the business. We are now organized into easy-to-follow segments of distribution, integrated standalone transmission and corporate. This streamlined and transparent reporting places entire companies and individual segments, simplifying reporting and eliminating reconciliations. In our distribution business, operating earnings were $0.30 a share versus $0.33 per share in the first quarter of last year, impacted largely by the planned increase in operating expenses I mentioned earlier, specifically around vegetation management work, partially offset by an increase in rates from capital investment programs and lower rate credits in Ohio.
In our integrated segment, operating earnings were $0.15 a share compared to $0.14 per share in the first quarter of last year. Results increased largely due to the implementation of base rates in all three jurisdictions in this business and rate based growth in formula rate programs, including integrated transmission investments, partially offset by planned increases in operating expenses. In our standalone transmission segment, operating earnings were $0.18 a share versus $0.17 per share in the first quarter of 2023, resulting from a 9% year-over-year rate base growth from our formula rate transmission capital investment program. And finally, in our corporate segment, losses were $0.08 per share versus $0.04 per share in the first quarter of 2023, primarily reflecting the lower planned earnings contribution from our one third ownership interest in the Signal Peak mining operation, decreasing from $0.08 per share in the first quarter of last year to $0.03 per share in the first quarter of this year.
Turning briefly to capital investments. First quarter CapEx totaled just under $900 million, an increase of nearly 22% versus 2023 levels and slightly ahead of our plan across each of our businesses, focusing on grid modernization, transmission and infrastructure renewal investments. As a reminder, CapEx for this year is planned at $4.3 billion versus $3.7 billion in 2023. Turning to regulatory activity. We are very pleased with the outcomes in the recent base rate case orders, consistent with our plan that allows for solid regulated returns for our investors while keeping rates affordable for customers. And we're committed to our customers and our communities to enhance reliability performance and support the energy transition through our Energize 365 capital investment program.
As Brian mentioned, in mid-February, the New Jersey BPU issued a final order on JCP&L's base rate case. The new rates, which customers will see effective June 1st and continue to be well below our in-state peer average, represent an $85 million rate adjustment on rate base totaling $3 billion, an ROE of 9.6% and a 52% equity capitalization ratio. And we are currently working through our Energize New Jersey infrastructure improvement proposal initially filed in November, including over $900 million in capital investments over five years aimed to enhance reliability and modernize the distribution system. In West Virginia, on March 26th, we received a final order from the Public Service Commission on our base rate case with rates effective March 27th.
The case resulted in a $105 million rate adjustment on rate base of $3.2 billion, an allowed ROE of 9.8% and a 49.6% equity ratio. Rates for our West Virginia customers remain about 22% below our in-state peers. Additionally, as Brian mentioned, in West Virginia, we received an order on our ENEC case for an increase of $55 million. We have been successful in reducing the $255 million deferral down to $168 million with full recovery expected by 2026. Now let's move on to current activity with Pennsylvania. Earlier this month, we filed a base rate case requesting a $502 million rate adjustment on rate base of $7.2 billion, an 11.3% proposed return on equity and a 53.8% equity capitalization ratio. The case builds on our service reliability enhancements in the state with additional investments in a smart, modern energy grid and customer focused programs while keeping rates comparable to other Pennsylvania utilities.
Key components of the case include implementing a 10 year enhanced vegetation management program to reduce tree caused outages, reduce outage restoration time and reduce future maintenance costs, recovery of costs associated with major storms, COVID-19 and LED streetlight conversions and changing pension and OPEB recovery to the delayed recognition method, which is based on traditional pension expense with amortization of previously recognized cumulative actuarial losses. The case also includes a blended federal state statutory tax rate of approximately 27% but also continues to provide customer savings from previous 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 using the delayed recognition method.
In addition to the base rate case, we plan to file a third phase of our long term infrastructure improvement program this summer, which will include capital investment programs to improve reliability for the customers of Pennsylvania. And finally, turning to Ohio. Earlier this month, we filed a settlement for the second phase of our distribution grid modernization plan, Grid Mod II. The settlement includes a $421 million four year capital investment program to continue modernizing the distribution electric system by completing the deployment of 1.4 million smart meters to our customers in Ohio. Finally, next week, we plan to file a prefiling notice of our Ohio base rate case with a full application and supporting schedules by the end of May.
Key highlights of the case will include a 2024 test year with over $4.3 billion in rate base and an equity capitalization ratio reflecting the actual capital structure of the companies, a plan to recover investments in riders' DCR and AMI, which includes the Grid Mod capital investments in base rates and reset those riders to zero, and some of the same other features that we included in other rate case applications, including pension recovery and pension tracking mechanisms. The current expectation is a proposal of a modest net increase to customers of less than $100 million compared to current revenues and an overall average impact of less than 5% of total revenues across all customers, which will be refined over the coming months. And finally, just to touch on the balance sheet and the closing of the FET transaction.
Obviously, a lot of hard work goes into any transaction like this but this was a great team effort, and we couldn't be more pleased with the results. Of the $3.5 billion in total proceeds, $2.3 billion was received at the end of March and was deployed immediately consistent with our plan to pay off short term debt and to redeem long term debt totaling close to $1.4 billion, of which $460 million was at FE Corp. We expect to receive the remaining $1.2 billion later this year, which will be used to fund our capital programs and additional liability management depending on market conditions. This transaction completes a series of transactions over the last two and half years that resulted in over $3 billion in high cost debt redemptions at FE Corp., close to $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.
And we are pleased to be back with an investment grade credit rating with all three rating agencies and understand and appreciate and respect the importance of this to all of our stakeholders. Thank you for your time today. And we're off to a solid start this year with strong execution and a significantly stronger balance sheet to fuel our growth going forward. Now let's open the call to Q&A.
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