Firstenergy Corp (FE) — Q2 2022 Earnings Call Transcript

Thank you. Welcome to our second quarter earnings call. Today, we will make various forward-looking statements regarding revenues, earnings, performance, strategies, prospects, and other matters. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by these statements can be found on the Investors section of our website under the Earnings Information link and in our SEC filings. We will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures, the presentation that supports 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 Steve Strah, our President and Chief Executive Officer; and Jon Taylor, our Senior Vice President and Chief Financial Officer. Several other executives will be available for the Q&A session. Now I'll turn the call over to Steve.

Thank you, Irene, and good morning, everyone. I'm glad you could join us today. Yesterday, we reported second quarter GAAP earnings of $0.33 per share and operating earnings of $0.53 per share at the upper end of our guidance range. Today, we are reaffirming our 2022 operating earnings guidance of $2.30 to $2.50 per share. We are also affirming our long-term annual operating earnings growth rate of 6% to 8% and accelerating our FFO-to-debt target of 13% by one year to 2023 from 2024, with targeted metrics in the mid-teens thereafter. As Jon will discuss later, given our strong year-to-date performance, we have begun strategically investing in maintenance activities in our distribution businesses to further improve reliability and get ahead of future planned work. This provides tremendous flexibility in our long-term plan. We will continue to accelerate these operating expenses during the second half based on the strong outlook for the remainder of the year. Through the first half of 2022, we've made significant progress to strengthen our culture, optimize our operations, bolster our financial position and support the grid of the future, continuing our momentum to become a more customer-focused and sustainable utility. Across the company, we're continuing to amplify our core values of safety, integrity, diversity, equity, inclusion, performance excellence, and stewardship. We've recently launched a new employee communication campaign to focus on each of these values and how they drive our success. In addition, I personally connected with thousands of employees over the past several months to discuss our core values and to hear directly from them on what we can do to get better as a company. Since March, I've held about 50 virtual and in-person listening sessions with more than 4,000 employees across FirstEnergy. We've had a lot of great engagement during these sessions, and it's been incredibly valuable for me to interact with employees and get their feedback. I'm very proud of how our employees are executing our plan and of the company and the culture we're creating together. I'd also like to take a moment to welcome two new directors who were elected to the Board at our Annual Meeting in May. Sean Klimczak of Blackstone and Jana Croom of Kimball Electronics. In related developments, John Somerhalder was elected Board Chair and no longer serves as an executive of the company. And Lisa Winston Hicks was elected Lead Independent Director. I welcome the guidance, leadership, and support from our refreshed Board. Now let's turn to some key accomplishments in the quarter. First, in May, we completed the sale of the 19.9% minority stake in FirstEnergy Transmission, LLC to Brookfield for approximately $2.4 billion. The proceeds from this historic transaction, together with the $1 billion Blackstone equity investment that closed in December, have been deployed to strengthen our balance sheet and fund our regulated capital investments. And as Jon will discuss in more detail later, by paying down over $2.5 billion in long-term debt this year, we are driving meaningful progress and are ahead of our original plan to improve the credit profile of the company. Our transmission business continues to be one of the focal points of our strategy. Our Energizing the Future program has a relentless focus on reliability improvements for our customers. We began the investment program in the ATSI region in 2014. And since that time, we have seen a 53% reduction in interruptions to customers caused by transmission outages, a 49% decrease in transmission line outages, and an 88% improvement of our protection systems. We're striving to build on this success within ATSI and across our territory as we continue to expand this investment program. So far this year, we've completed important work across our footprint to reconfigure several substations, rebuild transmission lines, replace transformers, and enhance network, cyber, and physical security. These projects improve operational flexibility, upgrade the condition of equipment, and enhance system performance. Our goals for the transmission business are aggressive yet achievable, and we have the right strategies in place to ensure our success. We're also making continued progress to advance our customer-focused, sustainable growth strategies on the distribution side of our business. In Ohio, earlier this month, we filed for the second phase of our grid modernization program, which builds off the system upgrades we've completed in the state since the PUCO approved our Grid Mod I program in 2019. The new four-year Grid Mod II plan proposes a $626 million capital investment to expand our deployment of Grid Mod technologies designed to enhance the delivery of safe, reliable power, promote modern experiences for customers, offer emerging technologies, and provide opportunities to help lower customer bills. The second phase of our Grid Mod program includes installing automated equipment on nearly 240 distribution circuits that can isolate problems, minimize the number of customers impacted by an outage, and quickly restore electric service. Energy-saving voltage-regulating equipment on nearly 220 circuits that can reduce the amount of energy that must be generated and more evenly distribute electricity down a power line. And an additional 700,000 smart meters along with the supporting communications infrastructure and data management systems. In addition, the filing includes several pilot programs expected to provide enhanced customer benefits. These include supporting the adoption of EVs across our Ohio service territory by offering incentives to residential and commercial customers who participate in utility-managed charging of their electric vehicles and installing a battery storage system along the Ohio Turnpike designed to support increased EV charging load and enhanced grid reliability. In the aggregate, we estimate the benefits to our Ohio customers of enhanced reliability, energy efficiency opportunities, and the innovative products and services to exceed the cost of the Grid Mod II program by nearly $280 million in today's dollars. Moving to West Virginia. In April, the Public Service Commission provided conditional approval of our requested tariff to build a total of 50 MW of utility-scale solar generation in the state at a cost of approximately $100 million. In their order, the PSC required our Mon Power and Potomac Edison subsidiaries to subscribe to at least 85% of the output before beginning construction on these facilities. We began accepting commitments from residential, commercial, and industrial customers to purchase solar RECs in May. We're making progress to meet the 85% threshold. And at that time, Mon Power and Potomac Edison will seek final approval from the commission for a surcharge to cover the balance of the project costs and begin full-scale construction. We expect the first solar generation site to be in service by the end of 2023, with the construction completed at the four other sites no later than the end of 2025. Finally, in New Jersey, JCP&L reached a settlement on our electric vehicle program with BPU staff, New Jersey Rate Counsel, and others, which was approved by the BPU without modifications in June. Our four-year $40 million EV-driven program is designed to accelerate the adoption of light-duty electric vehicles with incentives and rate structures that continue to support the development of EV charging infrastructure throughout our JCP&L service territory. The cost of the program will be deferred into a regulatory asset. Capital costs will earn a return of 9.6%, with recovery of those costs determined in JCP&L's next base rate case. Before I pass the call over to Jon, we recognize significant interest in our pension plan performance in light of rising interest rates and the current bear market. We're committed to being transparent and flexible on this issue, and we'll keep you informed of our expectations and our plan as the year progresses. In addition to the details Jon will provide on today's call, we've also published two new slides on this topic in our highlights document. I'm very pleased with our progress throughout the first half of this year. We remain committed to continuing our transformation and becoming an industry-leading utility that provides value to our investors, customers, employees, and communities. Now I'll turn the call over to Jon.

Thanks, Steve, and good morning, everyone. Thanks for being here. I'll start with some additional perspective on the pension, then we'll move into a discussion of our earnings and other financial matters. To put this all in context, the impact of the pandemic, the war in Ukraine, and other macroeconomic factors has resulted in extreme inflation and market volatility that we haven't seen in over 40 years. And so we recognize that this is a topic that has a lot of attention today, but we don't consider this an issue that impacts the long-term value proposition of the company. Through the first half of this year, interest rates have increased significantly, with the discount rate that measures our pension obligation increasing from 3% at the end of 2021 to approximately 4.8% as of the end of June. Likewise, equity markets across the globe were down significantly, with asset performance in our pension trust down approximately 15% through June. Although this results in an estimated earnings headwind of approximately $0.30 per share beginning in 2023, which reduces the noncash benefit from the pension from $0.40 per share in 2022 to an estimated $0.10 per share in 2023, the funded status of our qualified pension plan has improved from 82% at the end of 2021 to 84% at the end of June. Although we believe the earnings impact associated with the pension will normalize over time, we recognize that the historic market environment presents a challenge in the near term from an earnings perspective. And so let me take a minute to address this. First, our regulated strategy and capital investment program continues to be strong as we transition more of our capital investments to formula rates with real-time returns while working to lower our base operating expenses. Our base plan includes formula rate investments of approximately $2.4 billion in 2023 and $2.6 billion in 2024 that earned solid returns. In addition, as Steve mentioned, the outlook for 2022 is very strong, given the successful tender offer completed in June at our holding company and higher-than-anticipated income from legacy, commodity-based investments. And our FE Forward program continues to be part of our plan, allowing us to optimize our cost structure and be more strategic with our operating costs. In combination, these items allow us to accelerate future planned maintenance work into 2022 that will provide flexibility with operating expenses in future years while meeting our financial commitments for this year. We have also identified a number of other steps to address the pension headwind. These include accelerating additional capital investments and optimizing our financing plans, which includes moving $1 billion of planned debt financings from 2023 to future years, reducing corporate costs in our real estate footprint, as well as anticipated benefits from continued improvements we are seeing in customer arrears. From a regulatory perspective, we are exploring proposed changes to rate treatment for our pension to moderate impacts of market volatility between rate cases. But this will take some time and will likely be executed as we file base rate cases in each jurisdiction over the next few years. And so I'll conclude the pension discussion to say this. We realize this is complicated and recognize the potential near-term earnings impact on the company. But we do believe there is a clear silver lining. As markets became volatile and interest rates increased, we were able to take advantage of the situation by retiring high coupon debt and amounts well above our original plan. At the same time, rising interest rates reduced our pension liability by $550 million. And as a result, as Steve mentioned earlier, we made significant progress through the first half of this year to improve our balance sheet and strengthen the credit profile of FirstEnergy. Utilizing the proceeds from the Brookfield and Blackstone transactions, we eliminated approximately $2.4 billion of holdco debt in the first six months of the year, which equates to $125 million in saved interest costs on an annual basis. This includes the early retirement of an $850 million FE Corp note in January, a $500 million FE Corp note in June, and the repurchase of $1 billion in high coupon FE notes through our successful tender offer last month. This surpasses our original plan for holding company debt reduction and brings FirstEnergy holdco debt as a percentage of total debt to 26% from 33% at the end of 2021. And based on our current forecast with these enhancements, we are tracking just under 12% FFO-to-debt in 2022 and plan to be at 13% FFO-to-debt in 2023, a year ahead of what we initially targeted. Last week, Fitch upgraded FirstEnergy and FET to investment grade and upgraded our utilities to a BBB flat rating, reflecting the successful completion of our equity transactions, use of those proceeds to pay down company debt, and the expected strengthening of our credit metrics, our settlement to address key Ohio regulatory issues, and our meaningful improvements on governance matters. We are proud of the progress we made. And as we saw with the FET transaction, premium valuations of our businesses in the private sector give us significant optionality to further improve the balance sheet and increase value for shareholders. And now let's turn to a discussion of our financial performance for the quarter. Second quarter GAAP earnings were $0.33 per share, and operating earnings were $0.53 per share and within the upper end of our earnings guidance range. The $0.20 of special items in the quarter includes a charge of $0.17 per share associated with the redemption and early retirement of FE Corp notes that we discussed earlier. On a pro forma basis, excluding the impact of accounting changes, rate credits provided to Ohio customers, and equity financing transactions, operating earnings increased by $0.06 per share or 13% compared to the second quarter of 2021. On a year-to-date basis, we reported GAAP earnings of $0.83 per share and operating earnings of $1.12 per share. Again, adjusting for the impacts of accounting policy changes, Ohio rate credits, and dilution, this represents a $0.06 improvement versus our operating earnings for the first half of 2021 or approximately 6% year-over-year growth. Results for the quarter in our distribution business decreased slightly compared to the second quarter of 2021 but remain consistent with our expectations. The positive impact of our investment programs in Pennsylvania, Ohio, and New Jersey was offset by slightly lower residential customer demand, as I'll discuss in a moment, and higher planned operating expenses, including planned maintenance outages at our generation facilities, as well as the impact of accelerated maintenance work we mentioned earlier. I do want to note, despite the inflationary conditions, our year-to-date base O&M expenses are consistent with our operating plan, reflecting strong financial discipline. Total and weather-adjusted distribution deliveries increased approximately 1% compared to the second quarter of 2021 as a result of stronger demand from commercial and industrial customers, reflecting improving conditions versus last year. Residential sales decreased 1.6% on a year-over-year basis due primarily to milder weather compared to the second quarter of 2021. On a weather-adjusted basis, residential usage decreased slightly due to a continued shift to more normal work and social activities, albeit sales in this class continue to be elevated as compared to pre-pandemic levels. Deliveries to commercial customers increased 1.5% or 1.9% on a weather-adjusted basis, and sales to industrial customers increased 2.4% versus last year. And for the first time, industrial sales were higher than pre-pandemic levels by close to 1%, reflecting strong recovery and growth in many sectors, including steel, fabricated metals, automotive, and food manufacturing. In our transmission business, second quarter results benefited from strong rate base growth associated with our ongoing investments in the Energizing the Future program to improve reliability for our customers. We currently have more than 1,000 transmission projects underway across our footprint, and we've been successful working through acute supply chain challenges to remain on track with our plan to invest $1.5 billion in our system this year. And finally, in our corporate segment, our results improved by $0.09 per share compared to the second quarter of 2021, largely impacted by higher profits from our legacy investment in a mining operation in Montana as well as lower interest costs from our efforts around the balance sheet that I mentioned earlier. The legacy investment is from the late 2000s where we are a minority investor with a 33% share in the facility. Historically, it has not been a significant driver of our results. However, given higher commodity prices, the mine is outperforming our expectations for 2022 with both earnings and cash distributions, which, as I mentioned before, provides us significant flexibility to accelerate reliability and maintenance work in our distribution business. Although earnings from this investment may continue in the future years, our original plan did not include any earnings contribution beyond 2022. We're off to a solid start for the first half of the year with a strong outlook for the second half. As Steve mentioned, we are confirming our 2022 operating earnings guidance range of $2.30 to $2.50 per share and are also providing third quarter earnings guidance of $0.70 to $0.80 per share. While we're disappointed in our relative stock price performance since our first quarter call, given the progress we have made over the last years on many fronts, we're confident that our superior assets and clear strategy place us in a strong position to perform well in the future. With that, we'll go ahead and open the line for your questions. As always, thank you for your time and your interest in FirstEnergy.

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

Shar, this is John. So I think we've had some internal discussions about this. We have not talked to any of the regulatory commissions about this. But it is something that we're looking at, and we're trying to figure out mechanisms that can protect the company from the volatility that we're seeing today. And so, nothing necessarily set in stone, but looking for tracking mechanisms or some type of deferral mechanism that could protect the utilities from the volatility that we're seeing. And then to your second question, when we adopted the mark-to-market accounting, I think back in the 2010/'11 timeframe, that was a preferred method of accounting, and so we can't go back to another method.

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

Shar, before I turn it over to Jon for a couple of comments, I just wanted to, on an overall basis, just acknowledge it's a very fluid situation for us. We have put a plan together that Jon outlined in his prepared remarks, and it's up to us to work it. We continue to be very clear and transparent in our disclosures. And during the first quarter call, we were very upfront and straightforward about the challenge. We also have found a way to find a path forward. And we're going to continue to be very transparent on the issue. There are some things within our plan that are within our control and some outside of our control. As I said, it's fluid. And look, we're going to be committed to do what's reasonable to address the gap but be careful that we're not going to unduly impact our customers' experience with us and get our company off track. So I just wanted to make those introductory comments before I turn it back over to Jon.

Yes, and Shar, I'm not going to commit to the low or high end of the 6% to 8%. What I can say is that it's a very volatile situation. If we look at July, the broader markets are up, and there has been some softening in interest rates. The earnings headwind related to the pension has improved, and our funded status has also improved. So, it's a volatile environment and one that we're monitoring closely. I think it's important to approach this in two ways. First, if we consider year-over-year earnings growth in relation to the pension, it begins with our regulatory strategy, strong investments in transmission and distribution, and the rate structures we established from the Ohio SEET settlement that foster strong regulatory earnings growth. Next year, we will also see the full year impact of interest savings from the holdco debt reduction initiatives, which will contribute about $0.18 a share annually starting next year. This will be partially offset by new debt issuances, but it will positively impact year-over-year earnings. Additionally, we have planned operating efficiencies from FE Forward, benefits from the tender transaction, and investment earnings on the corporate side. The mining operation is allowing us flexibility to advance some planned maintenance work from future years. Moreover, we will address the remaining issues through various initiatives, including increased capital investments in the transmission system and reductions in corporate and support costs, such as external branding and communication expenses and downsizing our real estate footprint. We might even see an uplift from the mining operation next year that isn't included in our current plans. I mention this because it’s important to understand how we’re addressing the $0.30 headwind. Approximately 40% of that headwind will be mitigated by our current moves to adjust operating expenses. About 25% will come from changes in our financing plan, and the remaining third will involve reductions in corporate costs and the new capital investments I discussed earlier.

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

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

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

Yes.

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

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

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

Okay. That's helpful. My last question is about the improvement in FFO-to-debt happening sooner. Can you discuss any implications this might have on the timing of Fitch potentially upgrading to investment grade, as well as other agencies, and when you might think about increasing the dividend again?

I will address the discussion with the rating agencies. We have shared our new plan with them, which includes the tender transaction, our financing plan modifications, and the actions we will take to address the pension issue. This plan clearly indicates our goal of reaching 13% next year as we implement it. However, I can't speak for the rating agencies; ultimately, it is our responsibility to follow through with our plan. Moody's maintains a positive outlook for us, but as we discussed with them, it is crucial for us to effectively execute the plan to gain their confidence for an upgrade. Regarding the dividend, we are indeed focused on dividend growth. We understand that it has remained flat for the past three years. As our earnings begin to increase, we will keep considering dividend growth.

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

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

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

Well, I mean, I think you could probably, based on the number of customers we serve and the size of the states, our service territory in those states probably mirrors that pretty good. So I don't have the breakout by state, but we've been able to do some things in certain states, New Jersey, West Virginia, and Maryland, where we've had recent rate cases, and we were able to get some different treatment there. Ohio and Pennsylvania, it's been more traditional. In Ohio, we recover service cost only. Pennsylvania is based on cash contributions to the pension trust. So the exposure probably, you can just kind of pro rata it based on the number of customers each of those utilities have or each of those states have. But what we're really looking to do is try to protect the company from the volatility that we're seeing, for instance, this year.

A couple. First of all, I noticed in the back of the slide deck, you did not change your capital spend forecast. Some of the commentary you make about pulling forward spend, is what you're saying you'll pull forward over the O&M into 2022? Or are you talking about pulling forward capital or both?

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

The other question is regarding your regulatory section, which still highlights plans to file rate cases in all areas next year except Ohio, with Ohio expected in 2024. Are you filing these cases to address rate design, or because you believe you are under earning in the three states mentioned?

If you look at the return on equity that we reported for New Jersey, West Virginia, and Maryland, they are all below 8% for the second quarter on a last-twelve-month basis. Therefore, I believe we are not achieving a reasonable return at this time. As far as I know, there’s nothing concerning rate structure or rate design at the moment. We do have some time to plan and prepare for that, but mainly, we are focused on earning a reasonable return on our investments.

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

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

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

We have the DISC activated across all of our operating companies. According to our reports, we were earning approximately 8.1% on a pro forma basis, which accounts for the full year of accounting changes that have not yet been reflected in the actual results but will be over time.

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

Yes. Based on our current knowledge, we have identified everything necessary to offset the $0.30 headwind. However, I want to emphasize that the situation will be fluid and may change over time, so we need to monitor it closely. We will keep you informed about our progress. At this moment, we believe we can address the $0.30 headwind.

That's very helpful. And then just wanted to circle back to the management review process, if I could. Just wondering the timeline to conclusion there. When would we hear more? Do we need resolution of all actions in Federal court? Or just wondering what's the gating items to complete at this point?

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

Sorry, a couple of clarifications here. Just to confirm, are you still guiding to be approximately $2.55 to $2.60 for '23, right? And I know you said things are fluid, but the '23 number specifically here.

That's right.

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

There is some flexibility regarding the offsets related to how we can move expenses from future years into this year. We want to increase our transmission spending. The mining operation is somewhat unpredictable, which adds to the overall fluidity of the situation. Regarding the pension, we currently see it at $0.30, which has improved slightly as of last Friday. However, the markets are unstable, so $0.30 might go lower or higher. We will need to monitor this closely, but based on the information we have today, we feel fairly optimistic about our current position.

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

So just quickly addressing your point, the Pennsylvania tax rate is not structural and will return to customers, meaning it won't affect our earnings moving forward. However, we are implementing structural changes related to corporate and support costs and reducing our real estate footprint. The improvement in customer arrears and the ability to decrease uncollectible expenses could also be structural. The contribution from the mining operation is likely to vary since it relies heavily on commodity prices and the mine's execution of their plan. Therefore, there are many variables at play.

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

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

I have a clarifying question regarding the pension. You mentioned that the $0.40 benefit reduces to a $0.10 noncash benefit. How do you view that $0.10 pension benefit? Is it expected to be temporary and fade away over time? I understand it will fluctuate in the short term with the pension and the markets. However, is the $0.10 sensitive to future rate cases and will it be passed along?

Each jurisdiction has different rate treatments for customers. In the states where we will file next year, using 2022 as a test year, it will be at the $0.40 level. As a result, they will not experience the change to the $0.10 per share next year.

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

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

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

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

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

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

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

Yes. The latter, upcoming debt issuances.

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

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

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

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

So the plan is to continue to hold that investment?

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

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

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

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

No. I mean, regarding your pension, if you examine the accounting aspect, the pension is marked to market, and pension expense is determined based on year-end market conditions. This is what drives pension expense. If you specifically consider the interest component, there have been notable increases in interest rates, while the assets have decreased by 15%. This combination leads to volatility in what I would refer to as the typical pension exposure for us and, frankly, for other companies.

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