Firstenergy Corp (FE) — Q3 2022 Earnings Call Transcript

Thank you. Welcome to our Third Quarter 2022 Earnings Call. Today, we will make various forward-looking statements regarding revenues, earnings, performance, strategies, prospects and other matters. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by these statements can be found on the Investors section of our website under the Earnings Information link and in our SEC filings. We will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures, the presentation that support today's discussion and other detailed information about the quarter and year-to-date can be found in the strategic and financial highlights document on the Investors section of our website. We'll begin today's call with presentations from John Somerhalder, our Board Chair and Interim President and Chief Executive Officer; and Jon Taylor, our Senior Vice President and Chief Financial Officer. Several other executives will be available for the Q&A session. Now I'll turn the call over to John Somerhalder.

Thanks, Irene. Good morning, and thank you for joining us today. FirstEnergy continues to make significant progress in its transformation. Yesterday afternoon, we reported third quarter GAAP earnings of $0.58 per share and operating earnings of $0.79 per share. These results, which Jon will discuss in more detail later in the call, are at the upper end of our guidance and support our expectation for full year 2022 operating earnings in the top half of our full year guidance range of $2.30 to $2.50 per share, assuming normal weather. In addition to our strong financial and operational performance year-to-date, we continue to execute against our strategy to become a more resilient and forward-looking company that is positioned for long-term stability and success. We are building positive momentum through our ongoing efforts to strengthen our culture, rebuild shareholder trust, accelerate improvements of our balance sheet and drive operational excellence through innovation and continuous improvement efforts. And we are positioning our company to capitalize on significant opportunities for growth through long-term customer-focused investments. I'm privileged to work alongside the strong leadership team in this interim role, and I'm confident that this team and our committed employees will continue to execute on these strategies to transform the company into a best-in-class utility. And we intend to continue this momentum as we transition to a new Chief Executive Officer. The Board's external search is well underway, and we remain hopeful that we can make an announcement late this year or early in 2023. The key attributes we're seeking include a strong track record of executive leadership within the utility industry, a demonstrated ability to execute on the regulatory front, leading operational and financial discipline and impeccable credibility with external stakeholders. Our Board is excited about the future of the company and is confident in the leadership team and our strategy. We expect to continue driving the efforts that are already underway to ensure FirstEnergy is built for long-term success, and it's our expectation that the new CEO will see the same strong future that we see for FirstEnergy. We are entering this new chapter from a position of strength. As we continue to focus on balance sheet improvements through organic growth and operating cash flow and our plan to sell an additional minority interest in one of our distribution or transmission assets, we will further accelerate improvements in our credit metrics. Improving our balance sheet to be on par with premium utilities will support higher levels of capital deployment to harden and modernize the electric grid to support the energy transition. Before I turn the call over to Jon, I want to thank our employees for their efforts to move FirstEnergy forward over the last few years. They have been asked to step up time and time again to serve our customers, meet our commitments to stakeholders and stay focused on strengthening our company for the future. They continually rise to the challenge. Their hard work is helping us make great strides towards implementing our strategy and achieving our vision, and the Board remains committed to providing them with the support and resources they need to carry this company forward. I'm confident in the strength and talent of our team and our future. Now I'll turn the call over to Jon Taylor.

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

Jon, considering the pressures from inflation and interest rates, how much of the $0.30 pension headwind you previously mentioned have you managed to offset so far with your recent operational and financing adjustments, particularly with the addition of Signal Peak, which is benefiting from the changes in coal prices? Additionally, regarding the extra $0.15 you've referred to, what potential offsetting strategies are you exploring?

Yes, Shar, thanks for the question. Obviously, it's been a very fluid situation with the pension. During the quarter, the pension improved from $0.30 as of the second quarter to close to a $0.20 headwind at the mid-August time frame, and then it ratcheted back up to $0.45. I would tell you with the moves that we've already made with our financing plan, the OpEx that we're accelerating into '22 and the insight that we have into Signal Peak's earnings for next year, at least the sales that they have locked in at this point in time, we've captured the majority of the $0.30. And we just have a little bit left to do on the remaining $0.30, which we feel very confident in. So with respect to the $0.30, we feel very strong about it. But like we said in our prepared remarks, if it's above $0.30 in a material way, we'll look for opportunities, but we're not going to take the business off track for the long term.

Got it. I have a strategic question that is a bit more theoretical regarding asset optimization. Given the current interest rate environment, it has become more challenging to close deals, and I believe the buyer pool has somewhat diminished. Are you still considering only selling a minority stake in Pennsylvania, or could it be more beneficial in this environment to explore the sale of an entire operating company? This could potentially broaden the buyer pool by attracting more strategic buyers rather than just financial ones. It's clear that some utilities are currently interested in acquiring assets, but they might not be inclined to invest in a small stake.

We've seen continued strong interest for minority interest, either in a distribution business or additional sale of transmission facilities. Since that has remained strong, that works very well for us, either a 19.9% interest in the distribution business, which has tax benefits or potentially with strong value we continue to see in transmission, even though there will be some tax consequences that has value. So that's the direction that we think makes the most sense and based upon what we're seeing to date, we feel good about that direction. Jon?

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

For Jon Taylor, regarding the pension, I understand you may not want to discuss pension valuations frequently, but the market has returned to Q2 levels and appears to have increased by nearly 8% this month. Considering this, and even though the bond market has seen further declines, can you provide an update on your position relative to the $0.30 or the $0.45?

The $0.45 is probably in the same place or maybe slightly improved since September. Interest rates have continued to rise, and corporate spreads have widened a bit, which affects not only the interest costs on the liability but also the value of our fixed income assets in the trust. So I think it's somewhat better than the $0.45, but not significantly.

Okay. Great. Regarding your comments on the qualities you're looking for in a CEO, those all sound great. The real question is, how confident are you that you can find someone who meets all these criteria based on what you've seen so far?

The good news is the process is we've made good progress already on it. And we've identified more than a couple of dozen individuals that meet the criteria could be very good. And I would say that the interest level has been solid and strong as well. So we anticipate that we'll have a shorter list but still a list approaching 10 individuals that both are very well qualified, fit very well with our strategy and have interest at this point. We're encouraged at this point.

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

Yes. We spoke with them a few days ago, and the discussion was productive. We are continuing to implement the plan we provided them and are discussing timing. They are waiting to see us maintain our execution. They have an interest in how the minority interest sale will enhance our metrics. Once we're ready to make an announcement, we will include that in our forecast and initiate further discussions. Overall, the conversations have been very positive, and I believe it’s just a matter of time.

Could you consider selling part of the pension? Is there a regulatory approach that you could pursue? We saw a PEG in New Jersey file a request with the BPU to consider a different way of accounting for the pension. I'm wondering if either of those might be feasible options you are looking at.

Yes, I think selling the pension obligation could be a challenge due to its funded status, so I'm not sure it's something we would consider. Regarding regulatory mechanisms, as we file base distribution cases over the next couple of years, we will definitely look for ways to limit volatility exposure in the pension plan at our regulated companies. That is definitely an option we are considering.

Okay, that's helpful. In the slides, you mentioned a 20 to 40 basis points impact on FFO to debt from AMT. I was wondering if you consider this impact to be structurally permanent going forward, or could there be potential offsets in the cash flow forecast to mitigate the drag from AMT?

Yes. So I mean obviously, we need much more clarity from the Internal Revenue Service on the mechanics of the minimum tax. I mean the 20 to 40 basis points is not significant in the grand scheme of things when you think about FFO approaching $3 billion to $3.3 billion over the course of the next handful of years. So obviously for opportunities to offset that either through regulatory mechanisms or just further refinement in our operations. But I think to understand the final impact or the real impact, we just need a little bit more clarity from the IRS.

And David, I'd mention that we do see that impact as we move forward, but we have the other positives of just when we look at our ability to fund capital and increasing capital, we have enough cash to pay dividends, do that and the balance sheet improves moving forward. So just our plan, we'll continue to improve the balance sheet as we move forward. And then obviously, the minority interest sale further accelerates that. So we do have other very positive ways to move the balance sheet where it needs to be even with this 20 to 40 basis points of impact from AMT.

Yes, definitely smaller than some of the big positive changes that you're looking for.

Thanks, David.

Can you remind us about the ESP expiring in late May next year? Also, considering the possibility of needing to file a coal-blowing rate case at some point, have you discussed with stakeholders the potential for a global settlement that could integrate these issues into a multi-year rate-making process? This approach might help avoid having two separate proceedings and reduce long-term uncertainty regarding regulatory matters in the state.

Yes. Well, so Michael, thanks for the question. So I would tell you that we'll file the ESP V sometime next year. We have to make sure that we have a plan to procure generation for our customers beginning in June of '24. We also need to make sure that we have clarity on the capital recovery riders that we have in place and any other types of programs that will provide service to customers like our grid modernization program, any types of energy efficiency programs that we want to put in place. So I kind of see these as two separate work streams for ESP V, which needs to be approved before we get into the June 2024 time period. And then with the rate case that we have to file in May of '24, obviously, we have a history of settling. But given where we are right now, my sense is that's going to be a fully litigated case and might take us out into the late '25 timeframe before we get final approval on that.

Got it. Super helpful. And then one thing on Signal Peak. I mean, you've benefited from what's happened to commodity prices, although we had a bit of a pullback over the last couple of months and part of that is macro or trying to shut in a number of things. Is there a scenario where you look at yourself and say, you're not the logical owner of that stake? And how should we think about the market robustness for something like your stake in Signal Peak as well as the tax claim applications or implications for you all if you were to be a seller of that stake?

Yes. I wouldn't say the market is robust for that type of asset. Even with commodity prices where they are, I wouldn't consider it a robust market. We've had some interest in terms of people calling us about the asset. But as we started the dialogue, it just didn't make sense. And we're continuing to be open to those types of transactions and those types of discussions. But at this point in time, I wouldn't consider it robust.

Got it. And last one. Can you remind me what's the capital you're deploying in West Virginia to meet the environmental requirements? And are you getting a forward-looking or historical-looking cash return on that?

It's a $140 million capital investment for the affluent limit guidelines. And I think it's in the form of a surcharge that will be covered based on the capital you spend.

Yes. And importantly, I believe the depreciation rate for those dollars are in line with what we see as a logical end of life closer to 2035 or 2040 for the two plants. So we have that positive as well.

Listen, I know things are going real fine here in parallel with the New Jersey BPU. Can you comment at all about offshore opportunities here? It seems like you may have just won in recent minutes here, a decent chunk on that effort here. But can you comment as best you understand in your position here, I get that this is happening literally in real time, but any commentary or initial thoughts? Or at least provide some perspective about what you guys already felt, if you can?

Yes. It is happening in real time. I mean we have not yet reviewed the order or the details, but we do understand that our proposal has been successful to a large extent and something potentially approaching $1 billion of investment over the next 8 to 10 years, which we view as very positive and additive to our plan and why it's so important to have our balance sheet, the strength that we're targeting. So we're pleased with that. We're very happy to be a part of meeting New Jersey's clean energy needs in a way that really works for the customers. And we're using existing right-of-way impacts or less. So we're very positive, but we'll need to review the order and make sure we have more detail like you said, Julien, it's late breaking. And I'd ask Jon, Sam or to update if there's anything else that I missed on that.

No, I think I don't have anything else. I mean, of course, it would add to the plan we have shared with investors. The capital would likely start to be deployed around 2024 or 2025, potentially. So it would be towards the end of our current planning cycle but would enhance our plan moving forward. We're excited about that. But yes, like John mentioned, we need to review the order and ensure we fully understand it.

Understood. Thank you guys for at least attempting to broach that one here. Meanwhile, back to the schedule program. On 2023, I know there's been a lot of talk about pension here and the puts and takes. But can we talk about two other comments? First off, Pennsylvania, as best I understand this is the first time we've seen you guys indicate your filing for a case. Can you talk about, a, just how much of 2023 we could see an uplift? I mean you document in your slides here, earning a high 7% earned ROE. How swiftly could we see that improve potentially? Again, I don't want to prejudge a rate case outcome, but certainly some potential revenue deficiency is there. How much of an offset could that be to the $0.45? And in tandem, I know in the Q that was discussed this allocation question on the new methodology that you guys have implemented. And it seems like that's shifting some CapEx to expense. Can you comment a little bit more prospectively on how much more expense that would drive in '23 onwards versus your earlier rate base and CapEx forecast? It's not entirely clear here.

Yes, Julien. Let me address those points one at a time. Regarding Pennsylvania, we plan to file three cases next year for New Jersey, West Virginia, and Maryland. I expect those filings will happen in the early part of next year, but new rates likely won't be in effect until late next year or early 2024 as part of those cases. Therefore, I don't foresee any increase from those three cases in our plans for next year; any new rates would probably take effect in 2024. As for Pennsylvania, we mentioned we're considering filing a case. The unique aspect of Pennsylvania is that it involves a forward-looking test year, so we could potentially file that by late next year or early 2024, with rates likely effective 6 to 12 months afterward. Given our current regulatory plan, I don't expect any contributions from Pennsylvania next year. Regarding cost allocations, we have been discussing these accounting changes since late last year, where we reclassified some corporate support costs from capital expenses to operating and maintenance expenses. This adjustment is already included in our growth forecast of 6% to 8%, so there won't be any further impact from this moving forward.

Got it. Actually, with regard to Pennsylvania, it presumably allows you to speed up some of the capital spending there and consider enabling certain aspects.

Yes. So the current LTIP program expires at the end of '24. So obviously, we would have to file another application to expand the LTIP beyond that period. So I think all of that would happen together. And I do see Pennsylvania as an area where we could start to increase our CapEx there just given some reliability enhancements that we want to make.

Got it. Thank you guys. Good luck with the search.

Thanks, Julien.

So first, on Pennsylvania, the likely consolidation of your distribution companies there. Do you need to have that done before you potentially sell a minority stake in these businesses?

You don't have to have it done. If you were going to explore, like, for instance, a minority interest in our Pennsylvania business, you could do it at the same time, right? You could probably make a filing to consolidate the Pennsylvania companies and file an application to sell a minority interest. Maybe not exactly at the same time, maybe one, the consolidation first, but then the minority interest sale slightly or shortly thereafter, but you could do it commensurate.

Okay. And then separately, as you pointed out, you have this very busy regulatory calendar for the next 3 years. And it happens at a time when regulators are scrutinizing the affordability of electric bills. I mean, how do you plan to address this issue? And how do you think it is likely to impact the outcome of those proceedings?

Yes. The three states that we file in next year, if you just look at our total customer bills on a residential basis, we're probably 15% to 30% lower than the peers in those states. And so we feel like we have a good story to tell in terms of our customer bills. We recognize that generation prices are increasing. But at the same time, I think it's important to make sure that you have strong and financially healthy utilities to make sure that we can provide the level of service that's needed given the fact that customer expectations are only increasing as we transition to more electrification. So I feel like we have a good story, but we do recognize the concern that you mentioned.

Okay. And then lastly, is there any update on the pending SEC investigation?

On the pending SEC investigation. No update at this point in time.

I just wanted to come back to the pension headwind and '23 and kind of recognizing the fact that you reaffirmed the long-term 6 to 8 CAGR still. Can you just give us a sense of just overall kind of confidence level in maintaining this into '24 and '25? And what are the drivers that you see that kind of keep you in that 6 to 8 kind of range? I know you kind of brought up new rate filings and obviously, there's interest expense reductions from the debt paydown strategy. But could you just give us a better sense of your overall confidence level on the CAGR, please?

Yes. I mean, I think we've tried to highlight that previously. We feel really good about the plan for next year and beyond. I mean, obviously, we're moving some expenses around this year to help offset '23, which gives us a lot of flexibility going into next year. We're going to have the permanent benefits associated with the debt tender transactions that we previously completed. And then we have line of sight into Signal Peak's earnings for next year, at least a modest portion of what they plan to contribute to the company. And then we have other opportunities as we've highlighted before around corporate cost reductions, whether it be facilities costs, in our communications, advertising sponsorships that we look at each and every year. So we have a lot of opportunity and flexibility as we think about the long-term growth of the company.

Yes. I would add that in addition to those items, achieving the desired balance sheet is crucial. We believe there are good opportunities to enhance our customers' reliability and address similar issues as we continue to invest in the business. With a strong balance sheet and favorable affordability position, despite rising commodity prices, we see a chance to increase our investments moving forward and grow our earnings from those investments.

And then, Jon, you mentioned on Signal Peak that you locked in the sales largely for next year. So should we be kind of thinking about that earnings attribution as more fixed now rather than tied to commodities?

Yes. No, I think I highlighted they locked in a modest amount of their production for next year at prices consistent with what we're seeing this year. So we do have line of sight into some level of earnings contribution for '23. So they haven't locked in their full production schedule at this point in time but likely get that done by the end of the year.

My first question is, does your planned mid-'23 Ohio filing, does that represent a change in timing from what you had originally planned to file a GRC in Ohio?

No, no. So two separate filings, Paul. The base distribution rate case we'll file in May of '24. And then the ESP, we'll file for sometime early next year, first part of next year because this is going to take a little bit of time to get that in place and get that approved by mid-'24 when it needs to go into effect.

Okay. And what's the difference then between the ESP filing and the GRC filing? I mean, aren't they essentially setting the sort of prices for the same electricity?

So the ESP, the electric security plan, is a more broad plan that deals with generation service that you're going to be providing to customers, how you're going to procure those services from third-party suppliers, but also allows you to look at your current riders, distribution capital recovery riders, other programs that you want to provide to customers. So it's really everything but distribution rates and distribution rates would be part of the base rate case in '24, which likely won't go into effect at the earliest until sometime late '25.

And then can you quantify what the Signal Peak contribution is expected to be for the full year '22?

It will be north of $0.20, probably somewhere $0.20 to $0.25 is what I'm guessing.

Okay. And last question for me. If you file to consolidate the Pennsylvania operations, do you plan any type of capital contribution to Met-Ed and Penelec before that happens?

We haven't contemplated that, Paul. If I look at the capital to equity ratios in those businesses today, they're probably high 40s, if not in the low 50% range. So I wouldn't see a need to make any type of capital contributions into those companies.

First, I wanted to ask you about O&M. Absent new rates, how much offset do you have the higher costs, excluding pension headwinds, right? So from inflationary pressures, are there any mechanisms that you have now that could help you with those? Or do you have to just manage and absorb the increases until you get in rates?

We don’t have any regulatory mechanisms in place to address inflationary pressures for our day-to-day operations. Therefore, it is up to the company to manage our operating costs between rate cases.

Okay. And is there any way that you could get interim rates when you file the queue of rate cases next year?

When you mention interim rates, are you referring to some kind of tracker?

Interim rates that are put in place until the rate case is decided to help with the liquidity situation now like is often the case in various jurisdictions?

No, I don't think that is something that at least that I've seen. Obviously, we would explore that. But I haven't seen that before, especially in the states in which we operate in. Now I have seen companies get trackers, for instance, for vegetation management or other big spend that they have where they can defer costs over a certain level and then take care of that in the next rate case or have some type of amortization of those costs built into their rates. But right now, we would have to file for a case and then get those types of mechanisms in place going forward.

Great. Got it. And then on the Pennsylvania utilities, if you would contemplate validating those operations, right? Would that happen concurrently with filing rate cases before or after? How would that, I guess, work together?

Yes, I believe we will prioritize filing to consolidate first. Our plan is to submit that within the next few months, and after that, we will likely file a rate case at some point.

Yes. Just a follow-up on the offshore wind in New Jersey. What return would you be allowed in the transmission that you were talking about?

Yes, so Gregg, in the filing, we filed a 10.2% return on equity. So that was what was in our filing.

And how are you thinking about that 20% equity stake option in the project?

Yes. Obviously, that gives us optionality. We have the option to buy into the offshore component of the project. So that definitely gives us another opportunity to invest in a transmission-like investment.

Yes. But we have not made any final decisions on that. I think that's a good option for us to evaluate for our Board to consider, but we have not made final decisions on that.

Yes. Thank you, and thanks, everyone, for joining us today. We appreciate your continued support and we look forward to seeing many of you at the EEI Conference next month.