Categories Earnings Call Transcripts, Energy

FirstEnergy Corp (FE) Q3 2020 Earnings Call Transcript

FE Earnings Call - Final Transcript

FirstEnergy Corp  (NYSE: FE) Q3 2020 earnings call dated Nov. 02, 2020

Corporate Participants:

Irene M. Prezelj — Vice President, Investor Relations

Christopher D. Pappas — Executive Director

Steven E. Strah — Acting Chief Executive Officer

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Steven Staub — Treasurer

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs

Analysts:

Shar Pourreza — Guggenheim Partners — Analyst

Stephen Byrd — Morgan Stanley — Analyst

Julien Dumolin-Smith — Bank of America — Analyst

Angie Storozynski — Seaport Global — Analyst

Jeremy Tonet — JPMorgan — Analyst

Steve Fleishman — Wolfe Research — Analyst

Durgesh Chopra — Evercore ISI — Analyst

Paul Patterson — Glenrock Associates — Analyst

Michael Lapides — Goldman Sachs — Analyst

Paul Fremont — Mizuho Securities — Analyst

Charles Fishman — Morningstar — Analyst

Presentation:

Operator

Greetings. Welcome to FirstEnergy Corporation’s Third Quarter 2020 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 of Investor Relations for FirstEnergy Corp. Thank you, Ms. Prezelj, you may begin.

Irene M. Prezelj — Vice President, Investor Relations

Good morning, everyone, and welcome to our third quarter earnings call. Today, we will make various forward-looking statements regarding revenues, earnings, performance, strategies and prospects. 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 such statements can be found on the Investors section of our website, under the earnings information link and in our SEC filings. I would also call your attention to a new risk factor that is included in the 8-K we filed this morning.

We will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures can be found on the FirstEnergy Investor Relations website along with the presentation, which supports today’s discussion.

Participants in today’s call include our Executive Director, Chris Pappas; Acting Chief Executive Officer, Steve Strah; and Senior Vice President and Chief Financial Officer, Jon Taylor. We also have several other executives available to join us for the Q&A session.

For those of you who do not know Chris, he has been an Independent Member of the FirstEnergy Board since 2011 and he retired in 2019 as President and Chief Executive Officer of Trinseo SA. I’ll turn it over now to Chris.

Christopher D. Pappas — Executive Director

Thank you, Irene, and good morning, everyone. I appreciate the opportunity to participate in today’s call. I’m going to start out by discussing the leadership transition the company announced last week, my role with the company and the Board’s governance efforts.

First, I will note that the DOJ investigation prompted a number of shareholder and customer lawsuits, and we are also responding to a subpoena we received from the SEC on September 2nd, related to the investigation in the FirstEnergy by the SEC division of enforcement. We are cooperating with the DOJ and the SEC.

During the course of our internal review related to the ongoing government investigation regarding House Bill 6, the Independent Review Committee of the Board determined that three executives violated certain FirstEnergy Policies and its Code of Conduct.

When we determine that employee conduct is inconsistent with our policy and values, no matter how senior the individual, we have a duty to take action, and that is what we have done here. As a result, FirstEnergy announced on Thursday that CEO Chuck Jones, along with Dennis Chack, Senior Vice President of Product Development, Marketing and Branding; and Mike Dowling, Senior Vice President of External Affairs, were all terminated effective immediately.

Concurrently, Steve Strah, who many of you know from his roles as FirstEnergy’s President and previously CFO, was appointed acting CEO. Steve has the experience, credibility and the support of the Board in this role. Steve is a highly respected executive with deep knowledge of FirstEnergy’s business and significant operational experience. He became President in May 2020 as part of the company’s ordinary course succession planning process. In his various leadership roles at the company, including his recent tenure as CFO and President, Steve has supported the execution of FirstEnergy’s long-term customer-focused growth strategy and demonstrated his commitment to delivering value to all stakeholders, including employees, customers, communities and shareholders. I look forward to working closely with him in my new role as Executive Director.

In this role, I remain an Independent Member of the Board and will also work closely with Don Misheff, our non-Executive Chairman, to assist management team’s execution of strategic initiatives, to engage with the company’s external stakeholders, including the investment community as appropriate, and to support the development of enhanced controls and governance policies and procedures.

The Board is already conducting a full review of its governance and oversight processes to look for areas of improvement going forward. This is a serious matter for our Board and for FirstEnergy Management. In order to address this in a timely and effective way, the Board has formed a new subcommittee of our Audit Committee, to quickly assess and implement potential changes as appropriate in the company’s compliance program. This effort will be led by independent Board member, Leslie Turner.

Leslie retired as Senior Vice President, General Counsel and Corporate Secretary of The Hershey Company. She joined our Board in 2018 and is a member of the Audit and Compensation Committees. This new subcommittee will work with management, internal audit and also engage outside expertise for help and best practices.

As I previously mentioned, we have and will continue to cooperate with the DOJ and SEC investigations. We have also reached out to company’s key stakeholders, including the ratings agencies, banks, regulators, legislators and union leadership. We believe the actions the Board has taken, represent an additional step towards addressing these matters and enable’s FirstEnergy’s management to continue to focus on running the business day to day.

FirstEnergy embarked on a strategy several years ago to become a fully regulated company and grow through the substantial opportunities available in both the distribution and transmission businesses. That strategy will continue. It is working and the foundational drivers are intact.

The FirstEnergy organization at large has been delivering excellent results over the last few years and that continues with the strong performance year-to-date and the company’s expectations for the full year.

As we look ahead, the Board has full confidence in Steve and the rest of the team’s ability to ensure a seamless transition and to continue to execute the company’s strategy.

With that, I’ll now turn it over to Steve.

Steven E. Strah — Acting Chief Executive Officer

Thanks, Chris, and good morning, everyone. While I would have preferred to have assumed my new role under different circumstances, I agree with Chris that the actions taken by our Board of Directors last week, were absolutely necessary and are an additional step towards addressing this matter.

The management team is committed to working with the Board to assess and implement potential changes, as appropriate, with the company’s compliance program. We take this as a serious and important matter and we will begin to address this immediately.

In my 36 years with the company, we have faced challenges and changes, and we have always emerged stronger and even more dedicated to our mission. Our management team remains focused on keeping each other safe, providing reliable service to our customers and executing our growth initiatives.

I am confident that we will continue to carry out this plan, finish the year strong and enter 2021 with momentum. I look forward to working with our team to achieve this.

With that, let me transition to a brief update on our operations and recent regulatory activity, then Jon will review our results and other financial matters.

While the pandemic continues to impact our work protocols, our customers’ lives, and the economy, I am extremely proud of the hard work and resiliencies our employees have demonstrated throughout this crisis. We remain on pace to complete more than $3 billion in customer-focused investments across our system this year and our business model and rate structure continue to provide stability.

This morning, we reported third quarter operating earnings of $0.84 per share, $0.01 above the top end of our guidance range. Those results primarily reflect the successful implementation of our regulated growth strategies and favorable weather, together with a continuation of the pandemic-driven load trends we noted on our second quarter call.

As Jon will discuss in more detail, the earnings impact of higher weather-adjusted sales from residential customers more than offset the lower usage in our commercial and industrial sectors.

Based on our strong performance year-to-date and the expectations for the next couple of months, we are affirming our guidance range of $2.40 to $2.60 per share, and currently expect to be near the top end of that range. If decoupling is part of a House Bill 6 repeal, we would be closer to the $2.50 per share midpoint.

We have updated our funds from operations and free cash flow forecast for 2020, to reflect the impacts of higher storm costs of approximately $145 million and higher costs associated with the pandemic, including uncollectibles of approximately $120 million, most of which are deferred for future recovery.

Although the events of this past week and the government investigations create additional uncertainty, we are affirming our expected CAGR of 6% to 8% through 2021 and 5% to 7% extending through 2023, along with our plan to issue up to $600 million in equity annually in 2022 and 2023.

With that said, we are mindful that the current situation may present additional challenges to meet this objective. Jon will address some tactics we are taking to address uncertainty created by the investigation.

Now, let’s turn to regulatory matters. In New Jersey, JCP&L filed an AMI implementation plan with the Board of Public Utilities in late August. If approved, we would begin installing 1.15 million smart meters and related infrastructure across our New Jersey service territory, over a three-year period beginning in 2023.

Also, at JCP&L, last week, we were very pleased that the BPU approved our settlement in the distribution base rate case, as well as the sale of JCP&L’s interest in the Yards Creek pumped storage hydro generation facility. The settlement provides recovery for increasing costs associated with providing safe and reliable electric service for our JCP&L customers, along with the recovery of storm costs incurred over the past few years. It includes a $94 million annual increase in distribution revenues, based on an ROE of 9.6%.

The settlement also includes an agreement to delay the implementation of the rate increase until November 1st, 2021, to assist our customers during the pandemic. Prior to then, the rate increase will be offset through amortization of regulatory liabilities totaling approximately $86 million, beginning January 1st. The parties also agreed that the net gains from the sale of JCP&L’s interest in Yards Creek, estimated at $110 million, will be used to reduce the regulatory asset for previously deferred storm costs. We expect to close the Yards Creek transaction within the next few months.

Finally, to continue our commitment to customer-focused transmission investments, we filed an application with FERC last week, to move transmission assets in the Allegheny Power System zone to forward-looking formula rates. This includes transmission assets in the West Penn Power territory in Pennsylvania, the Mon Power territory in West Virginia and the Potomac Edison territory in West Virginia, Maryland and Virginia. We are requesting an effective date of January 1, 2021.

In addition, we created a new standalone transmission company, Keystone Appalachian Transmission Company or KATCo, to accommodate the new construction in this footprint. We filed last week to establish a forward-looking formula transmission rate for KATCo; and over the next several months, we plan to make the necessary filings to transfer certain transmission assets from West Penn Power and Potomac Edison to the new affiliate, requesting an effective date of January 1, 2022.

In closing, while I find it disappointing that we have arrived at this point, I have great confidence not only in the management team but in the full support of the Board of Directors; and together, we’re committed to lead this company out of it.

I’d like to reiterate that our regulated growth strategy is strong. It is working and it is moving forward, and I am committed to working with management and the Board to address changes to our compliance program.

Thank you for your time. And now, I’ll turn it over to Jon Taylor for the financial review.

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Thanks, Steve, and good morning, everyone. As always, all reconciliations and other detailed information about the quarter can be found in the Strategic and Financial Highlights document on our website. While we traditionally file the 10-Q in connection with our call, we don’t expect to file it this week, as we continue our review and closing procedures to ensure we provide appropriate disclosure.

Also, as we noted in Friday’s 8-K, the violations of certain company Policy and Code of Conduct by the terminated executives, has caused us to reevaluate our controls framework and that could lead to identifying one or more material weaknesses. However, based on our review of these issues, we do not expect any impact to prior period financial results.

This morning, we reported third quarter GAAP and operating earnings of $0.84 per share. As Steve noted, operating earnings were a $0.01 above the top end of our earnings guidance range, largely reflecting the ongoing success of our regulated growth strategy, as well as benefits from weather.

In the distribution business, revenues increased compared to the third quarter of 2019, as a result of higher weather-adjusted residential usage and incremental rider revenue driven by our capital investment programs in Ohio and Pennsylvania. Total distribution deliveries decreased compared to the third quarter of 2019, on both in actual and weather-adjusted basis. Cooling degree days were approximately 21% above normal and relatively flat to the third quarter of 2019.

Total residential sales increased 5.3% on a weather-adjusted basis compared to the same period last year, as many people continued to work-from-home and spend more time at home due to the pandemic.

In the commercial customer class, sales decreased 5.5% on a weather-adjusted basis compared to the third quarter of 2019. And in our industrial class, third quarter load decreased 6.3% compared to the same period last year. Consistent with the trends we’ve seen for the past 12 months, the only sector showing growth in our footprint was shale gas. As we discussed last quarter, the increased residential volumes more than offset the decrease in commercial industrial load from a revenue perspective.

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In our transmission business, earnings were flat compared to the third quarter of 2019, as the earnings growth associated with our energizing the future transmission initiative were offset by higher net financing costs and the absence of a tax benefit recognized in the third quarter of 2019. And in our corporate segment, our results primarily reflect higher tax benefits compared to the third quarter of 2019.

In the fourth quarter, we will make our annual pension and OPEB mark-to-market adjustment. Based on the asset returns through September 30th and a discount rate ranging from 2.7% to 3%, we estimate that adjustment to be between an after-tax loss of $330 million to a gain of $40 million. As a reminder, this is a non-cash item. Year-to-date, our return on assets is 9.2% versus our assumption of 7.5% and our funded status remains at 77%.

As Chris mentioned, we proactively reached out to the three rating agencies last week to discuss within the leadership transition and our path forward. While we believe the fundamentals of our business remain strong, we understand there are certain management and governance factors that the agencies consider in the risk assessment, which ultimately impact the credit ratings. The rating agencies have taken numerous actions and we have provided all the details in the Investor Factbook.

FE Corp remains at investment grade with both Fitch and Moody’s. At S&P, while we are not investment grade at FE Corp or FirstEnergy Transmission, all other subsidiaries remain investment grade at their issue-level ratings. We will continue to maintain our open dialog with each of the agencies and remain in close contact with them as we chart our path forward.

Finally, I’ll take a few minutes to review other financial considerations and tactical changes we are making to address the uncertainty created by the investigations.

First, from a liquidity perspective, I’ll remind you that we continue to have access to $3.5 billion of credit facilities committed through December 2022. These facilities are substantially undrawn with only $150 million borrowed, and we remain in compliance with all covenants and can make the necessary representations and warranties to borrow new funds. In addition, we expect our holding company debt to remain around 35% of total adjusted debt and we have no plans to increase debt at the FirstEnergy HoldCo.

To further refine expectations for 2021, I want to make a few comments about the dividend and reaffirm our dividend policy. Two years ago, at EEI, we announced a targeted payout ratio of 55% to 65% of our operating earnings. In alignment with that policy, our Board raised a quarterly payout by $0.02 per share for dividends paid in 2019 and then by $0.01 per share for those paid in 2020. Given our current yield of approximately 5%, we expect to hold our quarterly dividend at $0.39 per share or $1.56 per share on an annualized basis for next year. This would represent a 59% payout ratio to our CAGR midpoint for 2021. The Board will continue to review the dividend on a quarterly basis.

From a tactical perspective, our 2021 base O&M is flat to 2020 levels, and we assume begin developing plans for reductions to operating expenses, if necessary. With respect to our overall capital programs, for 2021, our capex programs will be at the $3 billion level and we will consider reductions if necessary. Equity continues to be a part of our overall financing plan. As Steve said, we are reaffirming our plan to issue up to $600 million in equity annually, in 2022 and 2023, and we will take the necessary actions financially to weather this uncertainty and put the company in the best position possible. We believe these steps are prudent to provide flexibility as we face uncertainty in the near term.

Before we begin Q&A, I’ll turn it back to Chris for a few more comments.

Christopher D. Pappas — Executive Director

As we move towards questions-and-answers this morning, I want to summarize a few points. The investigation and matters related to it are ongoing and therefore, we will not answer any questions related to this, other than to refer to our earlier prepared remarks. I know you have many questions. We are not going to provide more information at this time.

The Board and management view this as a serious and important matter, and our newly appointed subcommittee of the Audit Committee, led by Leslie Turner, as well as management and Internal Audit, will address this immediately.

FirstEnergy strategy is working and delivering results as shown in our third quarter 2020 results and our outlook going forward, but matters related to the investigation will add uncertainties to the future financial results of the company. The tactical financial changes that Jon described earlier, are prudent to provide flexibility as we face uncertainty in the near term.

And now, we’ll open to questions-and-answers.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Shar Pourreza with Guggenheim Partners. Please proceed.

Shar Pourreza — Guggenheim Partners — Analyst

Hey, good morning, guys.

Steven E. Strah — Acting Chief Executive Officer

Good morning, Shar.

Shar Pourreza — Guggenheim Partners — Analyst

Couple of questions here. First, does the Board intend on publicly releasing any of its findings while the federal investigations are going on? And has the DOJ given you any sort of timeline on a potential resolution?

Christopher D. Pappas — Executive Director

Hi. This is Chris Pappas.

Shar Pourreza — Guggenheim Partners — Analyst

Hey, Chris.

Christopher D. Pappas — Executive Director

Hi. No, to both is the short answer. The investigation is ongoing, and we will not be providing updates during that period and we have no certainty on the timeline at this point from the DOJ.

Shar Pourreza — Guggenheim Partners — Analyst

Got it. And then maybe just if you could, from a balance sheet perspective, just touch on how you could expect to finance a potential fine or penalty. I know you have some equity question with your $1.2 billion in guidance for ’22 and ’23 and potentially higher corporate tax rates could help improve the cash flows. So, what does sort of the balance sheet capacity look like if you run into a scenario where there could be a deferred prosecution agreement?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Hey, Shar, this is Jon.

Shar Pourreza — Guggenheim Partners — Analyst

Hey, Jon.

K. Jon Taylor — Senior Vice President and Chief Financial Officer

I think that’s why we’re taking the steps that we’re taking now, to provide additional balance sheet flexibility. When we cut back capex, when we think about operating expense reductions, that doesn’t necessarily max out your balance sheet over the next two years to fund that growth. In fact, it improves your balance sheet.

So, that’s why we’re taking the steps that we’re taking, to just kind of make sure that we address this uncertainty, because we don’t know where we’re going to be in a year or so with the Department of Justice, and whether or not there is going to be a fine of felony. So, we’re just slowing back on growth for the near term. We can take additional actions if necessary. And I think that will provide plenty of balance sheet flexibility.

Shar Pourreza — Guggenheim Partners — Analyst

Perfect. And then just lastly from me, do you guys have any sort of current expectations around the fate of HB 6? And doesn’t sound like that — could that sort of maybe impact your ability to provide ’21 guidance? And are you getting any sort of indication that the PUCO could maybe seek to reopen the current ESP which runs through ’24?

Steven E. Strah — Acting Chief Executive Officer

Shar, this is Steve. The way we’re viewing that is, the ESP and the distribution rate freeze, it’s in effect right now, will continue through May of 2024. The way I look at it, if the PUCO would approach the company for some other different reason to open it, we would follow the lead of the regulator. That’s really the way I would view it.

As for House Bill 6, we’re following along the progress and commentary, movements around the potential repeal of it. But right now, we’re just following along with the state legislature to see what they would like to do next. So, Eileen, anything to add?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Sorry, this is Jon. I would say that it depends on how — if it’s a repeal and a replace, how they put in the decoupling mechanism, if they put it in at all. So, I think there’s a lot of unknowns. But if you remember, going back to 2018, and then how we implemented decoupling this year, it wasn’t about a $0.04 or $0.05 help to our earnings profile in the current year. So, I think you’ve got to keep that in consideration when you think about these types of things.

Shar Pourreza — Guggenheim Partners — Analyst

Got it. And Steve, I wish it was under better circumstances, but really good luck on your transition, I’d say, given that you’re great. So thanks, guys.

Steven E. Strah — Acting Chief Executive Officer

Shar, thank you very much.

Operator

Our next question is from Stephen Byrd with Morgan Stanley. Please proceed.

Stephen Byrd — Morgan Stanley — Analyst

Hi, good morning.

Steven E. Strah — Acting Chief Executive Officer

Good morning, Stephen.

Stephen Byrd — Morgan Stanley — Analyst

I had just a process question. Has your internal committee been sharing all findings and documents with the DOJ and SEC, as you’ve been kind of going through your process?

Christopher D. Pappas — Executive Director

We’ve been cooperating with both agencies, Stephen, yes. The company is cooperating with both agencies, right.

Stephen Byrd — Morgan Stanley — Analyst

And Chris, are you confident that no other FirstEnergy officers and employees are in violation of FE policies or the code of conduct?

Christopher D. Pappas — Executive Director

The investigation, Stephen, is still ongoing, and it would be premature to make any comments on that till we get to a more conclusive state.

Stephen Byrd — Morgan Stanley — Analyst

Understood. Have you received any other subpoenas — I think you mentioned the September’s SEC subpoena. Have you received any other subpoenas from any federal or state entities recently?

Christopher D. Pappas — Executive Director

No.

Stephen Byrd — Morgan Stanley — Analyst

Understood. And have you uncovered any other violations that extend beyond the purview of the FBI investigation, for example involving other states or interactions with PUCO?

Christopher D. Pappas — Executive Director

It’s fairly premature to comment again, Stephen, the dismissals of the employees that you heard about last week, are related to violations of the company’s policies and code of conduct. And that’s really all we can say at this time.

Stephen Byrd — Morgan Stanley — Analyst

Yes, I understand. I know it’s a challenging for you to be able to address some of these questions. And do you have a sense over what timeframe you’ll be sort of coming to your internal conclusions in terms of the investigation or is the target unclear?

Christopher D. Pappas — Executive Director

I think the timeline is unclear. What we can say is that the subcommittee that we formed under the leadership of Leslie Turner, will begin their work immediately on working on our own internal policies and compliance, and we’d expect some readout from them as the company reports its first quarter earnings. That’s not around the investigation, to be clear, that’s around working on improving our policies around compliance. That’s a parallel process, of course, the investigation.

Stephen Byrd — Morgan Stanley — Analyst

Understood. Last one from me just on the Q. Jon, you mentioned potential for material weaknesses. Are there any particular sort of financial implications, financing implications or other implications if you do end up concluding that there are material weaknesses?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

I wouldn’t think so. Like I said, based on everything that we’ve looked at, even if we conclude there is a material weakness, there wasn’t any issue with the previous financial results that we’ve reported to our investor community. So, no, I wouldn’t expect any issues like that.

Stephen Byrd — Morgan Stanley — Analyst

Understood. I’ll let others ask questions. Thank you.

Operator

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

Julien Dumolin-Smith — Bank of America — Analyst

Hey, good morning, team. Thanks for the time. I hope you’re all hanging in there. I wanted to — just picking up on the earning side of the equation here, if we can. Can you more expose the ability, the puts and takes here in terms of the balance sheet latitude, as well as the earnings trajectory outlook? Just — so, if I hear you right, for instance, it sounds like there is some cost levers, one. Two, it sounds like the decoupling piece could be about $0.10 from $2.50 to $2.60 give or take. And then third, I’m curious if there is anything else in terms of potential impacts, if you can address it from a credit ratings change, on future financing assumptions you baked into the plan as well, if there is anything else?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Julien, that’s a lot there. I mean, let me see if I can kind of address it. We’re taking these steps to preserve balance sheet flexibility, that’s — I mean, we’re in an uncertain period of time. This thing has to play out over a period of months, maybe into next year. And we think it’s just prudent to take these steps to cut back on some capex, to maybe look at some operating expense reductions, so we can have some flexibility if something bad goes our way.

I would say the decoupling mechanism is only about $0.04 or $0.05, not the $0.10 that you mentioned. So, I think in the grand scheme of things, that would be something that we would overcome in a year.

Steven E. Strah — Acting Chief Executive Officer

Yes. Julien, this is Steve. I would just add, in my prepared comments, we talked about reaffirming our business plan and it’s very strong and it’s very robust. In terms of confirming our CAGR for EPS through 2023, our plan remains unchanged at this point. I think what you’re also seeing with our most recent quarter result, you’re seeing the resiliency of that business plan that we’ve talked about before. So, I think that speaks very strongly for our company and for the potential next few — well, the potential next year or two, of some level of uncertainty here.

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We’re not only sticking with that base business plan, but as we announced today, we are moving the Allegheny assets into formulaic rates from a transmission standpoint. And at that point, once that’s concluded, you’re going to see our transmission system 100% on formulaic rates moving ahead. So once again, it takes the strength that we have in our transmission program and it even deepens it more. So, that’s the perspective that I would bring to it.

K. Jon Taylor — Senior Vice President and Chief Financial Officer

And Julien, this is Jon. I think you had a question on just financing costs. As you think about the ratings that we have today, we are still investment grade with all the rating agencies except for S&P, and that’s at FirstEnergy HoldCo, and then FirstEnergy Transmission. The majority of our financings over the next few years are going to be at our subsidiaries, which have investment grade credit rating. So, I don’t see that being too much of a challenge. We do have some holding company debt that comes to due in ’22 and ’23, but we’ll be able to manage through that.

Julien Dumolin-Smith — Bank of America — Analyst

Got it. Excellent, that’s what I was thinking. I was trying to reconcile those moving pieces here. If I can clarify even further, when you think about the — preserving balance sheet flexibility, do we expect updates here in the next couple of quarters as far as explicit target and what that means from an earnings perspective, going forward? Obviously, this is somewhat fluid, but curious on how you would prepare to delineate it.

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Right. I think we’ll have more next — early next year when we talk about the fourth quarter results.

Julien Dumolin-Smith — Bank of America — Analyst

Got it. All right, excellent. Well, best of luck. Thank you very much.

Steven E. Strah — Acting Chief Executive Officer

Thanks, Julien.

Operator

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

Angie Storozynski — Seaport Global — Analyst

Thank you. So, I mean, I know we’re trying to look forward, but I’m still processing the information that we were provided during the second quarter earnings call. And I know that Chuck is no longer with the company, but I mean can you help us maybe reconcile those statements with the attempts to rebuild credibility among investors? Yes, I will leave it open ended like that.

Christopher D. Pappas — Executive Director

Well, Angie, it’s Chris. I think the only thing we can say is the internal investigation by the Board and outside counsel has led to the outcomes that you saw Friday, and that’s really the only kind of comment we can make about that past. And the dismissals of the executives mentioned, were for violations of company policy and code of conduct.

Angie Storozynski — Seaport Global — Analyst

Okay. And then could you share with us if you have talked to your state regulators and what kind of feedback you have received following this news about management changes?

Steven E. Strah — Acting Chief Executive Officer

Angie, it’s Steve. We did do a comprehensive outreach, not only to the state legislators, the regulators, state and local officials, throughout our footprint. So, I think if I was to characterize the outreach and the feedback, they were appreciative of our very prompt effort to talk to them and communicate the news. There were obviously, various levels of surprise and shock if you will, of the actions that the Board took, in a very decisive manner. But they understood once we talked them through that in general, just like we are today. And there were concerns expressed, right? It was a significant change. It happened very quickly, and really this is where we really have to lean on the relationships we have with the regulatory bodies. We’ve worked very, very hard over decades — at least a decade that I’ve been with the company — to ensure that we have great two-way communication and give and take on various issues. And this is where you rely on those relationships.

As acting CEO, I’m going to really make it a large part of my role to ensure that we can continue to communicate very closely with them, listen to concerns, respond appropriately and move ahead. It’s like any other relationship in life. It’s two-way communication and I need to instill and promote that level of trust in FirstEnergy and I’m prepared to do that.

Angie Storozynski — Seaport Global — Analyst

Thank you. And just last question, given how the stock is trading and given that you have equity needs even without this investigation or any potential penalties that may come out from that, would you consider asset sales or something else in lieu of straight up equity?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Angie, this is Jon. I think we’re taking these actions internally with capex reductions, opex reductions, to give us flexibility, including issuing equity. So, I think those are the things that we’re focused on first, and then we’ll see where we are sometime down the road.

Angie Storozynski — Seaport Global — Analyst

Great. Thank you.

Operator

Our next question is from Jeremy Tonet with JPMorgan. Please proceed.

Jeremy Tonet — JPMorgan — Analyst

Hi, good morning.

Steven E. Strah — Acting Chief Executive Officer

Good morning, Jeremy.

Jeremy Tonet — JPMorgan — Analyst

I just want to follow-up a bit on some of the earlier conversation with Ohio. And if Ohio repeals or replaces House Bill 6 legislation, can you walk us through the exact impacts there? You guide to the top end with no changes, but to the midpoint if decoupling is repealed. Sounds like half the drag is retroactive full year decoupling removal, but what were the other kind of moving pieces there, if you can explain — if you could clarify a bit there, that’d be great.

K. Jon Taylor — Senior Vice President and Chief Financial Officer

So, I think you would go back — the assumption would be, we would go back to the rate construct that we had in 2018. So, you would remove the decoupling mechanism, but then you would reestablish your energy efficiency rider under the rider DSC. So, that would be the construct. So, it would be about a $0.05 hit to earnings.

And then you would no longer, going forward, depending on how they repealed and replaced, if decoupling was no longer part of the rate structure going forward, then you would have those, that mechanism, that rider DSC in place going forward.

Jeremy Tonet — JPMorgan — Analyst

Got it. So, I think you said $0.05 there, just trying to figure out, I think you pointed to the top end of the guide with HB 6 in the midpoint without being kind of a $0.10 delta there. So just wondering what the remainder of that delta is, I guess, that drives the high-end versus the midpoint?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Well, maybe I’ll say it this way, right now we think we’re going to be near the top end. If we hit the $0.05 or that House Bill 6 is repealed with the decoupling, we’ll be around the midpoint.

Jeremy Tonet — JPMorgan — Analyst

Got it. Okay. And then just one last one if I could — appreciate. This is a bit of an awkward question, but just wondering Chris, while Steven is now the acting CEO, what are the next steps forward here on the CEO process?

Christopher D. Pappas — Executive Director

I think it’s a great question, Jeremy, happy to answer. Steve has been clearly the candidate in our Board normal succession planning process for the CEO of the Company. That’s evidenced by his movement through the company, including his prior role as President. Due to the circumstances what we experienced last week, the Board decided to move Steve immediately into the acting CEO role. And we would envision continuing on our succession plan, which is to, at the right time in the near future, have him assume the role of CEO. So, in my view and the Board’s view, we’re on a normal transition to CEO with the person we always had in mind.

Jeremy Tonet — JPMorgan — Analyst

That’s very helpful context. Thank you.

Operator

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

Steve Fleishman — Wolfe Research — Analyst

Hi, good morning. Just wanted to make sure I clarify the tactical changes relative to your — the one tactical change is you kept the dividend flat, and then I guess the other tactical changes are potential cost cuts and capex cuts. If those latter ones are made, would that change your plan meaningfully or is it still kind of within the construct of the plan as reaffirmed?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Steve, this is Jon. We would do that all in the construct of the plan we’ve been talking about.

Steve Fleishman — Wolfe Research — Analyst

Okay, that’s helpful. And the — I know you mentioned, there is no — if your credit ratings at the FE parent are, I guess both S&P and Moody’s downgraded below investment grade, there is no need for any triggers or any other related impacts?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

No.

Steve Fleishman — Wolfe Research — Analyst

Okay. And then on the credit line and facility, if you have these material weaknesses in your Q, that doesn’t affect those facilities at all?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Let me let Steve Staub take it up.

Steven Staub — Treasurer

Hey, this is Steve Staub. I’m the Treasurer of the company. So, in the event that there would be any violations of any covenants under our credit facility, we would then, at that point in time, have to go and request a waiver from our bank group.

Steve Fleishman — Wolfe Research — Analyst

Okay.

Irene M. Prezelj — Vice President, Investor Relations

Steve, this is Irene. I believe you said that Moody’s downgraded us; Moody’s affirmed our rating.

Steve Fleishman — Wolfe Research — Analyst

I’m sorry, I guess I meant that both did. Yes, I’m aware of that before the agencies did, in the end.

K. Jon Taylor — Senior Vice President and Chief Financial Officer

So, Steve, if both rating agencies downgraded us again, which means S&P’s rating would go from BB plus down to BB, and all of our utilities at that point would go down to non-investment grade. And then the Moody’s credit rating would go from Ba3 to Ba1. Our financing costs would obviously be a little more expensive. The HoldCo step up provisions that we have with our bonds at the holding company, which applies to about 4 billion of them, would obviously become a little more expensive, because they would increase by about 50 basis points in terms of cost. Our credit facilities would become a little more expensive, that would increase storm pricing by 25 basis points and we would have to post potentially up to about $40 million of collateral.

It’s all manageable. [Speech Overlap] I do want to say that we have experience at the BB plus credit rating right now, with respect to S&P; S&P had us at that rating from 2010 through most of 2018. And so, we are experienced at that current credit rating right now, and I wouldn’t expect any issues accessing the capital markets if the ratings were lower, simply it would just be more — it would just be a little more expensive for us.

Steve Fleishman — Wolfe Research — Analyst

Great. That’s very helpful. But it’s not like the liquidity-type events, it’s just a little bit higher financing costs?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

That is correct. I mean we’re a fully regulated company now, so FES is no longer a part of FirstEnergy. And back then, when it was a part of us, collateral requirements would have been much higher.

Steve Fleishman — Wolfe Research — Analyst

Great. I’ll leave it at that. Thank you. Appreciate it.

Operator

Our next question is from Durgesh Chopra with Evercore ISI. Please proceed.

Durgesh Chopra — Evercore ISI — Analyst

Hey, good morning, team. Thanks for taking my question. I have one clarification then one quick follow-up. Just on the internal investigation, is that now over? I appreciate there is a subcommittee to look at sort of governance practices and improve them perhaps, but just is the internal investigation now over at this point?

Christopher D. Pappas — Executive Director

No, it is still ongoing, as are the other investigations.

Durgesh Chopra — Evercore ISI — Analyst

Thanks for that clarification. And then just maybe one for Jon. Jon, we’ve had done a discussion with investors around regulatory ROE versus GAAP ROE, specifically in Ohio. Maybe just could you help us where you are with that differences? What drives the differences there and where is regulatory versus GAAP ROE perhaps at the end of Q3 or maybe even earlier in the year?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Well, there’s obviously several differences between how we report our financial results for GAAP and how we report them from a regulatory perspective. For instance, from a regulatory perspective in Ohio, you excluded the DMR when that was in place. There is other things that from a regulatory perspective that you exclude. For instance, in Ohio, you only get pension service cost as part of your rate, so the non-service piece is excluded from the regulatory, which is typically a credit for us. So, there are items like that that really drive the difference between what we report on a GAAP basis versus what we report on a regulatory basis.

Durgesh Chopra — Evercore ISI — Analyst

Got it. And then maybe can you comment and perhaps it is a follow-up with Irene, but can you comment where you are in terms of the regulatory earned ROE in Ohio?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Well, we filed the Ohio seat for 2019 and we were at 10.9%, 10.8% somewhere around there. So, that’s kind of where we are.

Also Read:  HP Inc. (HPQ) Q4 2020 Earnings Call Transcript

Durgesh Chopra — Evercore ISI — Analyst

Okay, great. Thanks, guys. Much appreciate the time.

Operator

Our next question is from Paul Patterson with Glenrock Associates. Please proceed.

Paul Patterson — Glenrock Associates — Analyst

Hey, good morning.

Steven E. Strah — Acting Chief Executive Officer

Good morning, Paul.

Paul Patterson — Glenrock Associates — Analyst

Just to sort of clarify here. It sounds like we may not get any — you guys aren’t really planning on disclosing anything until after the DOJ investigation is complete in public, is that the way to think about this?

Christopher D. Pappas — Executive Director

Yes.

Paul Patterson — Glenrock Associates — Analyst

Okay. And then with respect to KATCo, could you remind us, I think that’s going to begin in 2022 or that’s what you guys have planned. Could you remind us what the earnings impact would be of that?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Well, I think we’re going to file for rates effective 1-1-’21, and then we would move those assets into that transmission company 1-1-’22. If you look at the rate base, it’s $750 million somewhere around there. So, you would — at first, I don’t think it’s going to be as meaningful, just because you are on a stated rate today and you’re going to transition to a formula rate. But it is an area where investment is needed and it’s an opportunity to improve the customer reliability in those service territories, and I think you’ll start to see some capex going in there and then it could be meaningful.

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs

Hey, Jon, it’s Eileen Mikkelsen, Vice President Rates and Regulatory Affairs. I would just add that once those forward-looking formula rates go into effect in 2021, we would expect that revenue to be really just about 1% higher than it would have been in the stated rate in that initials here.

Steven E. Strah — Acting Chief Executive Officer

Yes. And just to place it in the broader context, right now, with — that really represents perhaps 10% of our transmission footprint. So, it’s not going to be large or significant, but once again it completes the strategy that we have for transmission, that is to move off the stated rates in the Allegheny footprint and go to formula. And as we proceed at JCP&L, we’ll be successful there, we’re confident, and this will be the last progression.

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs

Yes, interestingly, this is the last sort of large zone in PJM that does not have formula rate. It’s not in — it’s in stated rate.

Steven E. Strah — Acting Chief Executive Officer

Very good point.

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs

So, comes with the transition.

Paul Patterson — Glenrock Associates — Analyst

Okay. I apologize for being a little off on this, but I think you guys are asking for 11.35% ROE and you guys plan on getting that, that ROE being effective for $750 million worth of assets beginning in 2021. And if I understand that correctly and I’m just sort of wondering what the ROE, I know it’s different jurisdictions and stuff, but just what’s the ROE in general that you guys have in those jurisdictions right now, roughly speaking?

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs

It’s Eileen. And again, the ROE was part of a black box settlement that was established for the state rates many years ago. So, there is no stated ROE. What we did file for the forward-looking formula rates is a base ROE of 10.85% and then the 50 basis point [Indecipherable] for RTO participation, bringing that ROE up to 11.35% as filed.

Paul Patterson — Glenrock Associates — Analyst

Okay. Well, I’ll follow up afterwards. Thank you so much.

Steven E. Strah — Acting Chief Executive Officer

Thank you.

Operator

Our next question is from Michael Lapides with Goldman Sachs. Please proceed.

Michael Lapides — Goldman Sachs — Analyst

Hey, guys. Thank you for taking my question. First one is probably for Jon, which is, I’m trying to think about the accounting of the JCPL rate case. Can you walk us through the earnings impact of the rate increase versus the cash flow impact? I understand there are probably difference given the amortization of the reg liability. But just, does the rate increase not really impact earnings next year? Does it not really impact cash flow next year or does it not impact both?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

It does not impact cash flow next year, but it will impact earnings next year because you will implement the base rate increase beginning January of ’21, but that will be offset by our amortization of a regulatory liability. So, customers will not see the increase, but FirstEnergy will receive the earnings.

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs

Yes, Jon and I would just add to that that we will pick up two months, November and December of 2021 for base rate increase. Lot of cash there. And the company as a condition of the settlement, be able to retain the Yards Creek gain, which is an influx of approximation etc. They are $110 million expected in 2021.

Paul Patterson — Glenrock Associates — Analyst

Got it. And if I think about it, the revenue increased just over $90 million. Are there costs that go up with it that will be offset on the income statement, or will that $94 million drop to the bottom line?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Yes. If you remember, part of our request was to collect deferred storm costs, the adjusted storm costs that are included in the base rate. So, there are costs associated with that rate increase.

Michael Lapides — Goldman Sachs — Analyst

Got it. Can you just give us an inkling of how much of that then does drop to the bottom line?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

I think it’s $0.04 to $0.05 a share.

Michael Lapides — Goldman Sachs — Analyst

Meaning that’s the benefit from the $94 million in rate increase?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

That’s correct.

Michael Lapides — Goldman Sachs — Analyst

Got it. Thank you, Jon. Much appreciated. Whilst any — and this maybe a Steve question. Any thoughts at all about generation transformation, meaning transforming the fleet in West Virginia going forward? Just curious, given that’s the one place you own generation and it’s obviously a coal heavy fleet in West Virginia. Just curious given the declining costs of gas-fired generation as well as obviously solar and wind, how you’re thinking about what your fleet looks like three to five years from now there?

Steven E. Strah — Acting Chief Executive Officer

Well, right now, we’re working towards publishing — not publishing, but submitting our IRP for West Virginia. So, within that document, we’re going to articulate some of our moving forward thoughts for West Virginia. You are right, it is a coal fleet there for us and we’re very cognizant of our responsibilities to run those plants. However, as you look forward, there is an opportunity, for example, to be able to install solar within the state right now and we’re also considering that. So, more on that later. We’re due to submit that filing in December of this year. Correct, Irene?

Michael Lapides — Goldman Sachs — Analyst

Got it. Thank you, guys. Much appreciated. Thanks for taking my questions.

Steven E. Strah — Acting Chief Executive Officer

Thanks, Michael.

Operator

Our next question is from Paul Fremont with Mizuho Securities. Please proceed.

Paul Fremont — Mizuho Securities — Analyst

Thanks. I guess the first question I have, just to get a better understanding of the 5% to 7% growth through 2023, which I thought had been, in part at least, linked to your rate base growth. In terms of — if you end up cutting back on capex and you have less rate base, would you be making that up then through O&M reduction or can you just explain how you would be able to maintain the 5% to 7%?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

I think there is a lot of different moving pieces. Cost containment would obviously be one thing that we could do, and we already have seen some favorable impacts in our forecast from the favorable returns we had last year in our pension, so that’s going to flow through. If you think about where interest rates are today versus where we — where they were when we confirmed our CAGR last year. Borrowing costs are down, we had a very successful bond deal at FE Corp earlier this year. So, they’re all factors that are driving our confidence in that number.

Now, there is some uncertainty that we have to deal with, and that’s why we’re taking these steps to kind of provide for some flexibility if something goes — doesn’t go our way. But just because we’re cutting back capex $250 million is not going to throw us off track to hit those results.

Steven E. Strah — Acting Chief Executive Officer

And just as a reminder, that’s $250 million roughly on a budget within our plan that we were counting on to be $3 billion to $3.25 billion. So once again, it’s prudent to do the planning right now and it’s a small portion of a much larger pie that helps fuel our transmission earnings power.

And by the way, just to emphasize it, as we’ve said before, very important for customers too. We’re seeing significant reliability improvements within those investments. So, it’s dual, right? Customers are seeing benefit and it is a very good earnings engine for the company appropriately.

Paul Fremont — Mizuho Securities — Analyst

Next question would be, on the second quarter call, you had indicated that you would not seek to alter a potential rating agency downgrade to sub-investment grade because you expected to be vindicated as part of the investigation. Are you now comfortable to remain sub-investment grade, with at least one rating agency?

Christopher D. Pappas — Executive Director

No, no, we’re not comfortable with that. I mean, but at the end of the day, it’s related to governance issues, and I think that’s why we’re taking the steps that we’re doing to address the governance matters, the compliance matters with Leslie’s subcommittee and that’ll be part of what they focus on.

Paul Fremont — Mizuho Securities — Analyst

So, your expectation would then be, once you put additional governance measures into place that the rating agency would then reverse the downgrade action?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

I mean, we would have to talk to them about the steps that we’re taking, the findings we found, the recommendations. I think it’s going to take some time for us to work through this. But our focus is going to be improving on those types of matters, so we can get the rating back to investment grade.

Paul Fremont — Mizuho Securities — Analyst

So, you would not take action to issue equity to try and bring the rating back up?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

No, no.

Paul Fremont — Mizuho Securities — Analyst

Great.

Steven E. Strah — Acting Chief Executive Officer

Okay. Thanks, Paul.

Operator

Our next question is from Charles Fishman with Morningstar. Please proceed.

Charles Fishman — Morningstar — Analyst

Thank you. On — with KATCo, as I recall, with ATSI in May, as part of the Energizing the Future, there was such an incredible opportunity for investment because of deferred investment really with the things going on at FES, the balance sheet and everything else like 10 years ago. Is there that same opportunity at KATCo once we get beyond 2023? And assuming the forward rate making goes into effect, would you envision the investment accelerating if that transmission go?

Steven E. Strah — Acting Chief Executive Officer

I think there is significant opportunity in KATCo and that’s exactly why we made our filing. I think it also provides additional flexibility for our company to move, let’s just say, that $3 billion transmission spend around our system. So, once again, while under a stated rate, we believed our strategy would be better suited to go after investments in other formulaic rates around our system.

When you look at the reliability of the transmission system in general, we found greater needs at ATSI and MAIT, rather than pursuing anything in Allegheny in the early going of the Energizing the Future program. It’s very difficult to believe, but we’re entering, I believe, year seven of that program.

So, we’ve seen reliability improvements in both of the other transmission companies. We are certainly not done yet. I believe we have a pipeline of 20 years worth of work that we have affixed a $20 billion number to in terms of potential additional transmission upgrades. So, to your earlier point, there is, what I would call, a pent-up need there and we’re responsibly addressing it.

Charles Fishman — Morningstar — Analyst

That’s helpful. Thank you. That’s all I have.

Steven E. Strah — Acting Chief Executive Officer

Thank you. Okay, well thank you very much. Yes.

Operator

Please proceed.

Steven E. Strah — Acting Chief Executive Officer

Okay, thank you very much. I just wanted to close out the call by thanking you for your time and attention today and the interest in our company, and I know that we did our very best today to provide you a fulsome update on recent key events. We also look forward to talking and meeting with each of you in the virtual EEI conference coming up. So look forward to that very much.

I would also just close with the message of safety. The pandemic that is still very much alive in this country, as a company we’re working very hard to keep our employees safe and our customers safe. I just wish all the best to each one of you as we maintain the right safety protocols while we’re working through it. So, all the best to you and be safe. Thank you.

Operator

[Operator Closing Remarks]

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