第一能源 (FE) 2020 Q2 法說會逐字稿

Greetings, and welcome to the FirstEnergy Corp. Second Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Ms. Irene Prezelj, Vice President of Investor Relations. Thank you. You may begin.

Thanks, Donna. Welcome to our second 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.

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 Chief Executive Officer, Chuck Jones; President, 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.

Now I'll turn the call over to Chuck.

Thank you, Irene, and good morning, everyone. Thanks for joining us. As Irene indicated, we have a new lineup of speakers today, reflecting the management changes that were put in place in May. Steve Strah in his new role as President of FirstEnergy, will discuss the operational and regulatory updates on today's call; and Jon Taylor, returning to the financial room in his new role as CFO will review our results.

As we've discussed, these changes are the result of extensive succession planning with our Board and a thoughtful and proactive plan to ensure we are prepared for a smooth transition in the leadership of our company.

Let's begin by addressing the issue that's been in the news recently. As you know, the Ohio speaker of the house and 4 others were arrested on Tuesday on federal criminal charges. The case involves political activity related to Ohio House Bill 6, which recognizes the value of the nuclear power plants operated by our former subsidiary, FirstEnergy Solutions, now known as Energy Harbor.

Also on Tuesday, FirstEnergy Corp., our FirstEnergy services company, subsidiary and our political action committee were served subpoenas related to this matter. We are having discussions with the Department of Justice lawyers and will fully comply with the subpoenas. I believe that FirstEnergy acted properly in this matter, and we intend to cooperate fully with the investigation to, among other things, ensure our company and our role in supporting House Bill 6 is understood as accurately as possible. In the meantime, we wanted to share our preliminary perspective on this issue and reinforce the values with which we operate our company.

This is a serious and disturbing situation. Ethical behavior and upholding the highest standards of conduct are foundational values for the entire FirstEnergy family and me personally. These high standards have fostered the trust of our employees, our customers and the financial community. We strive to apply these standards in all business dealings including our participation in the political process. As you know, we have supported keeping Ohio's 2 nuclear plants in operation. We believe in supporting the thousands of families, former FirstEnergy families who rely on the jobs those plants provide. These are good tax paying jobs that we believe are critical to Ohio's economic development efforts. We also believe that it is in the best interest of all Ohioans and our nation to maintain these sources of 0 carbon, clean, affordable and reliable energy. So as we discussed on previous earnings calls, we supported legislative solutions for the nuclear plants, even after we stopped operating them. We were strong supporters of House Bill 6 and opposed the referendum effort to repeal it. We gave our support because FirstEnergy has the obligation to serve 2 million customers in the state of Ohio, including looking out for their long-term energy supply. Even though we are no longer in the competitive generation business and would not get a single dollar of the House Bill 6 funding for those plants.

In addition, that passage of House Bill 6 resulted in a rate decrease for Ohio customers despite the nuclear surcharges. But let me be clear, at no time, does our support for nuclear plants in Ohio interfere or supersede our ethical obligations to conduct our business properly. The facts will become clear as the investigation progresses, and we support bringing the facts forward. Our leadership team will remain focused on executing our strategy and running our business in the same consciences manner that you've come to expect. With that, let's talk about the other developments since our last call.

I know the impact of the pandemic and economic slowdown remains on everyone's mind. Our business strategy remains resilient, and we are well positioned to continue managing through the COVID-19 crisis. We continue making our planned investments and deploying capital across our system, and we've not experienced any significant disruptions in our supply chain or workforce.

To protect the health and safety of our employees, their families and our customers, we made adjustments to our work procedures early in the pandemic, and we've continued refining those practices over the last several months. Our employees, both those in the field and the 7,000 who transition to working from home in March haven't missed a beat. Our team has rallied together in the face of this challenge. We've established a workplace return plan for our employees who are working from home. But given their strong performance during the past few months, we are in no rush to get them back to the office. Likewise, I'm extremely proud of our physical workforce for the great job they've done. They have adopted new protocols to keep each other safe while continuing to provide the electricity our customers need. We continue following all established precautions for preventing the spread of this virus. That includes cleaning and disinfecting measures, temperature checks, masks, and adjustments to reporting locations, work schedules and crew sizes. I'm pleased to note that this increased focus on protections from COVID has extended beyond the virus and helped drive a stronger overall safety performance for our company through the first 6 months of this year.

At FirstEnergy, safety is an unwavering core value and we will continue to provide employees with a safe working environment as we do our part to stop the spread of this disease.

As I said during our last call, one of the silver linings of this crisis is the FirstEnergy team is coming together to work smarter, more creatively and more efficiently than ever before. Other events in our country, namely the outcry over inequality and social injustice faced by people of color have also brought us together with a deeper sense of urgency and a renewed focus on the areas of diversity and inclusion. This is an issue we had already been working to address within FirstEnergy for a number of years. And we are actively taking steps across the company to help drive positive changes and promote equality within our workforce and our communities.

Let's move to our second quarter results. Yesterday, after market closed, we reported earnings of $0.57 per share on both a GAAP and operating earnings basis. This was at the upper end of the earnings guidance we provided for the quarter. While Jon will discuss the drivers in more detail later in the call, I'll point out that as we expected, our business model and rate structure provided a measure of stability during this period of pandemic and economic slowdown. As we discussed in April, about 2/3 of our base distribution revenues come from residential sales with 28% from commercial customers and about 7% from the industrial sector. In addition, about 80% of commercial rates and 90% of industrial rates are made up of customer and demand charges.

As a result, what we told you in April has borne out through this quarter. While weather-adjusted load dropped by almost 4% system-wide compared to the second quarter of 2019, the increase in residential revenues related to the stay-at-home orders in our service territory more than offset the decreases in the commercial and industrial sectors. While I don't think anyone is in a position to predict what the future might bring in terms of continued reopening or reclosing of the economy, we're taking a conservative view of what the next few months might bring.

Nevertheless, we remain very positive that we are well positioned to continue managing the impact of the pandemic and the economic slowdown. And we believe our distribution and transmission investments will continue to provide stable and predictable earnings.

We're affirming our 2020 operating earnings guidance range of $2.40 to $2.60 per share. We're also affirming our expected CAGR of 6% to 8% through 2021 and 5% to 7%, extending through 2023 as well as our plan to issue up to a total of $600 million in equity in 2022 and 2023. Also for the third quarter of 2020, we are introducing an earnings guidance range of $0.73 to $0.83 per share.

Thank you. Now I'll turn the call over to Steve Strah.

Thanks, Chuck. It's good to talk with all of you again today in my new capacity. I'll walk through a brief update on some regulatory matters as well as our operations. To begin, we are pleased that since our last call, the utility commissions of West Virginia and New Jersey have both authorized deferral mechanisms for incremental COVID-19 related costs. And the Pennsylvania PUC authorized a deferral mechanism for uncollectible expenses. As we told you in April, Maryland was the first state in our service territory to put such a mechanism in place. And we already had existing riders in Ohio and New Jersey for uncollectible expenses. As you know, our regulatory calendar is very light through 2023, and we only have a few open matters at this time. I'll touch on some recent developments.

In New Jersey, an ALJ was assigned for the distribution base rate case we filed in February. As you'll recall, we are seeking to recover increasing costs associated with providing safe and reliable electric service for our JCP&L customers, along with recovery of storm costs incurred over the past few years. We anticipate a procedural schedule to be issued soon, and we remain optimistic that we can reach a favorable settlement with the parties in the case. Also in New Jersey, we are in settlement discussions with our formula rate filing for JCP&L's transmission assets. In December, FERC accepted our application to move these assets into a forward-looking formula rate effective January 1, 2020, subject to refund. This supports our plan for approximately $175 million in customer-focused capital spending on the JCP&L transmission system this year.

Moving to the operations front. As Chuck indicated earlier, we continue to execute our plans for 2020. Even with the significant precautions to keep our employees and customers safe, we remain on track to make more than $3 billion in customer-focused investments to strengthen and modernize our transmission and distribution systems this year. With the goal of enhancing reliability, resiliency and security, while improving operational efficiency.

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

Good morning. It's great to speak with you today. Consistent with our normal practices, you will find all reconciliations, along with other detailed information about the quarter in the strategic and financial highlights document that's posted to our website.

Now let's review our results. As Chuck said, we reported second quarter GAAP and operating earnings of $0.57 a share, which is near the top end of our earnings guidance. In our distribution business, revenues increased compared to the second quarter of 2019 as a result of higher residential usage, incremental rider revenue in both Ohio and Pennsylvania and higher weather-related usage. This benefit was offset by the absence of the Ohio DMR revenue, which ended in July 2019 and higher expenses, including nondeferred COVID expenses I'll describe in a moment.

Total distribution deliveries decreased slightly compared to the second quarter of 2019 on both an actual and weather-adjusted basis. Heating degree days were approximately 27% above normal and 58% higher than the second quarter of 2019, while cooling degree days were 2% above normal and 6% higher than the same period last year.

The stay-at-home orders in our service territories drove an increase in total residential sales of 17.1% or 14.8% on a weather-adjusted basis compared to the same period last year. In the commercial customer class, we saw a sales decrease of 14.4% on an actual basis and 14.5% when adjusted for weather compared to the second quarter of 2019. And in our industrial class, second quarter load decreased 11.7% compared to the same period last year. As Chuck indicated earlier, the increased residential volumes more than offset the decrease in C&I load from a revenue perspective for a benefit of $0.04 per share in the quarter.

Let me spend a moment on our COVID-related expenses, which impacted earnings by about $0.04 per share in the quarter. As Steve mentioned earlier, all of our utilities are able to defer uncollectible expenses that are incremental to amounts included in base rates as well as other COVID-related costs in New Jersey, Maryland and West Virginia. Uncollectible expense increased in the quarter due to the pandemic and reduced earnings by approximately $0.02 per share. This represents the amount of uncollectibles currently being collected through base rates, and as a result, could not be deferred. The remainder of our increase in uncollectibles was all deferred for future recovery with no impact on earnings.

While the pandemic is still very fluid, we continue to expect that deferral mechanisms we have in place and our focus on managing O&M bids will mitigate the impact of COVID costs and keep us on track to meet our financial commitments.

In our transmission business, earnings decreased slightly, primarily due to higher net financing costs and the reconciliation of the estimated versus actual true-ups of our 2019 formula rates. We continue to see earnings growth associated with our ongoing energizing the future transmission investment program. And in our corporate segment, our results reflect higher operating expenses compared to the second quarter of 2019.

Before we open up the call to your questions, I'd like to discuss a few other financial matters, starting with our pension performance. As a result of our conservative investment strategy, which we described last quarter, our pension plan continues to outperform the turbulent market. Asset returns were at 5.7% as of June 30. And as of today, we are around 9%, tracking above our 7.5% annual target. Our investment committee has taken prudent steps to further derisk the plan's asset allocation in anticipation of additional market volatility with the goal of preserving the plans year-to-date asset returns and to protect the plan's funded status, which remains unchanged at 77%. Finally, in June, we successfully completed the refinancing of $750 million and FirstEnergy Corp. debt at a blended rate of 2%. We also completed a $175 million debt financing at Potomac Edison. And in July, we completed a $250 million debt financing at CEI.

Our liquidity remains strong at $3.5 billion with our credit facilities in place through December 2022.

In light of the current investigation, I want you to know that we are currently compliant with all covenants and can make the necessary representations and warranties as required under our credit facilities to borrow money.

In regard to our financing plan, our debt maturities are minimal through 2021, with only $74 million expiring next year, and our new money requirements are very manageable. With only 2 transactions remaining in 2020, totaling $250 million and only 4 transactions in 2021, totaling $575 million.

With that, I'd like to turn the call back over to Chuck for some closing comments before we begin Q&A.

Thanks, Jon. There was an erroneous media report that FirstEnergy had held an investor meeting yesterday. No such meeting happened. So if anyone was feeling left out, I wanted to make that correction.

In my earlier comments, I tried to candidly address the investigation by speaking from the heart and giving you a sense of where we are and what we currently know. As we move to the Q&A, I would really like to let my prepared remarks stand. Please recognize that I won't be able to speak to any great detail on many of your questions. I appreciate your understanding on that. And I really hope we can focus the Q&A on the great quarter we just reported on.

Now we'll take the first question.

(Operator Instructions) Our first question today is coming from Steve Fleishman of Wolfe Research.

Yes. I can't help but asking. So as best you could answer. The -- could you maybe give more color on in terms of the payments that are talked about to this 501(c)(4), how much was that from FE versus FES? And why -- did you have any control over FES payments as well?

Well, first, let me take the second half first. And as of November of '16, when we essentially made the competitive generation business noncore, FES separated fiduciarily, financially and operationally from being a part of FirstEnergy. They put in place an independent board. And from November '16, I've had no input into any of the decisions they've made. Obviously, we've had a lot of discussions between the 2 companies as it relates to transition and shared services and so forth. But in terms of decision-making authority, mine ended in November of 2016. On your specific question, as I've said, I'm not going to get into the details of the case, but I will say this, that of the funds that are referenced in the Department of Justice affidavit, FirstEnergy's share of that is about 25%. And in the context of 5.5 years of meeting or exceeding every earnings commitment that we've given you every quarter, we do make prudent decisions to spend corporate funds on issues that we believe are important to our customers and shareholders. Beyond that, we intend to provide the details on what we spent, how we spend it to the Department of Justice in the coming weeks.

Okay. I'm not sure you can comment on this, but can you talk about the reference like phone calls between you and other leadership and some of these folks, could you talk to that at all?

No, I'm not going to talk to that. I talk to a lot of people. I text with a lot of people. I probably text more than I talk these days. So we have to see what they're talking about. I can tell you this, in every meeting, every phone call, every text message that I participate in, I've talked about our obligations to conduct our business transparently, ethically, professionally. I have no worries that I did anything that wasn't that way. And we let the merits of our arguments carry the day when we are operating in the political environment.

Okay. Just for color because everyone seems to focus on this $60 million of spending. Just how much did the other side spend? And did they have similar 501(c)(4)s on this HP 6?

Steve, our share was 25%. I'm not going to speak for the other side. You're going to have to go talk to them.

I meant people that opposed the law, I'm sorry.

Well, the interesting thing about that is, it's all we don't know who spent it because it was spent through similar organizations, legal, 501(c)(4) organizations, where donors aren't. And I don't know the amount that was spent on the other side. But clearly, this was a provocative, difficult issue in the state of Ohio. A lot of money was spent on both sides of this issue, particularly after House Bill 6 was passed, and it got into the referendum process. The process of gathering signatures, the media ads, there was a lot of money spent on both sides, and 501(c)(4)s were used on both sides.

One last quick question, Chuck. Just are you going to do -- is the Board going to do some kind of like independent review of all this as part of the response? Could you give more color on that?

Right now, we're planning to do an internal review of everything involved in the affidavit, which obviously is going to be necessary for us to respond to the questions in the subpoena. I think the Department of Justice review is the most important review that needs to get going and get completed.

Our next question is coming from Shar Pourreza of Guggenheim.

So just on the similar topic, can you just maybe give us a little bit more granularity on the separation process in 2018? I know we understand some of the IT and things like payment processing, continue to go through a company, a service company. So FE Corp. for some time. But it isn't like clear how everything else was actually bifurcated, i.e., sort of at the management level. I mean how much interaction did FE corporate senior management have with FES after the filing? When were the nonback-ended functions actually split?

Well, in November of '16, we were providing on the order of $300 million worth of corporate shared services to the generation business. The process of winding all of that down went all the way to the date where they emerged from bankruptcy and even beyond that. I can't tell you the specifics of when each individual function ceased to be performed by the transition shared services agreement, and when FDS or Energy Harbor started to do that on their own. I can't answer the question of whether our executives were involved in the running of FES or Energy Harbor at any point after November of 2016, and the answer is no. We were not involved. We created corporate separation for a reason. We had to get about negotiating a plan of separation with FES. It's bondholders, it's creditors. There's no way we could have done that by operating on both sides. So we severed those ties. We were not involved in any way in the decisions made by FES.

Got it. And then several of sort of the individuals charged or long-time lobbyists who interacted to some degree with company A and company A1 over the time period in question. Can you tell us with any kind of specifics what their affiliation was with both A and A1, for example, on individual peers to have a contact with sort of both the enterprises in question. Let's maybe just elaborate a little bit on the affiliations of those that were charged.

Well, let me say this. We do employ lobbyists. When we do, we expect them to act in the same ethical manner that we hold ourselves accountable for. The lobbyists named in the affidavit and subsequently arrested, did not work for FirstEnergy on House Bill 6. And to my knowledge, they have never worked for FirstEnergy. Who they work for, I'm not sure, but I know they did not work for us.

Got it. And then, Chuck, just one last question. And just a follow-up on Steve's on the 501(c)(4). What was like the underlying vetting process at the time for making those payments? I mean, would regulatory affairs just request them and receive approval freely? I guess how do you assess whether those funds were directed towards the 501(c) would be used for like "social benefits versus political aspirations?"

With all your respect, Shar, I'm going to stay away from that question.

Okay. Well, thanks, Chuck, for addressing some of this. I know it's a tough subject and the visibility is really important.

Our next question is coming from Julien Dumoulin-Smith of Bank of America.

At risk of delving into the obvious again. If I can follow on Shar's line of questioning. For on the services arrangement, I just want to understand the historical setup here. Obviously, this historical arrangement on the services side lasted for some time as you just articulated. But with respect to the external affairs piece of this, how do you think about the decision-making under that services arrangement, right? Because if you can clarify a little bit, I understand that you all were doing a lot of different things, including running external affairs for them, which would presumably include some of these related activities. How do you think about what that would include? And in running a services arrangement, what does that mean in terms of their decision-making versus your own if you can articulate that a little bit more?

External affairs was one of the areas that they separated very quickly and put in place their own Vice President of External Affairs. Began working with their own law firms. Began working with and hiring their own lobbyists. We were virtually out of the external affairs business for FES very shortly after November of 2016. So it's a bad assumption to assume that we were doing that for them. We were not.

Right. So to the extent what you were running a services arrangement for them in other facets for a longer duration, including seemingly through some of 2020. It's specifically in the context of external affairs, which would presumably include lobbying, that seems to have terminated very quickly. If I'm…

I think you should think about it more in terms of administrative affairs that we were providing them. Payroll, HR services, some financial services, IT services, those types of things. We were providing -- it took a while to figure out how to get that all separated. But the things that are involved with leading and running a company, all separated very early.

And then if I can ask, when you think about the funding of the 501(c)(4), I mean to the extent to which that you've done this in the past, you've done -- you contributed to the 501(c)(4) even prior to the separation of the companies here. I mean that is not necessarily in question here. Just to be very clear with you all, when you think about the investigation here, I just want to separate perceptions from perhaps some of the realities of the case. If you can speak to that and activities in 501(c)(4)?

I bracketed the amount of money that we spent on House Bill 6. I'm not going to get into the details of how we spend it on this call.

Understood. Last question for you, super quick. I know you've articulated your own plans about the transition of the management team, and then that was obviously -- how do you think about your…

We're losing you, Julien. I can't hear your question.

Sorry. Do you think you'll stay on through the pendency of the investigation just to help support the government?

Well, to my knowledge, I've never articulated anything than what we've publicly said. And I think I've said that I have made no definitive retirement plans, and it certainly won't be this year.

And I absolutely am not going to not do my part to help restore the reputation of this company to what it duly deserves.

Our next question is coming from Stephen Byrd of Morgan Stanley.

I just wanted to talk about FES and governance there. Was there any FirstEnergy executives on the Board of FES post 2016?

Say that again, Stephen.

Post 2016 at FES, were there any FirstEnergy executives or other FirstEnergy folks on the Board of FES?

No FirstEnergy executives were on the Board of FES.

Okay. And then just another question…

FES selected independent directors, and I think Donnie Schneider, who was the President of FirstEnergy Solutions was on the Board, but no FE executives served on that board.

Understood. And then just another question on the statement that the company made about this that you don't believe anything was done wrong. There was a fairly short time between the subpoenas being issued to a number of FirstEnergy entities in that statement.

And I guess I'm just wondering, and there's no delicate way to ask you exactly that. It's a pretty short time to kind of make an assessment to make sure that everyone felt confidence that no one at FirstEnergy was doing anything wrong. What gives you the confidence that no one was doing anything wrong, given the short amount of time between the subpoenas and the statement issued?

I would just say that -- so first of all, our statement was that we believe that FirstEnergy acted properly in our dealings on House Bill 6. We can't speak to what happened by anybody other than FirstEnergy. The financial support we provided to House Bill 6 isn't complicated. We know what we did. We know why we did it. We're looking forward to sharing that with the Department of Justice. That's what gives me the confidence to be able to say that we acted properly.

Okay. Understood. And just last question. In terms of -- we've seen some rating agency, sort of action statements recently, do you see any need to support your credit position in the near to medium term given those statements? Or do your equity plans sort of stand and you don't see that need, given what we've seen already from the rating agencies on this investigation?

Well, first of all, we've got plenty of liquidity right now. And as you might imagine, I spoke to both S&P and Moody's since Tuesday. We've seen what S&P did. They put us on a 90-day negative watch. When I spoke to them both, I'll tell you what I told them. I told them that they should not put the ratings integrity of their ratings on the line for FirstEnergy. That it's my job and our company's executives team's job to take care of our reputation, and we will do that. But I also told them that we're the same underlying company that existed before Tuesday. We've got an improving balance sheet, FFO to debt that's moving into the 12% to 13% range, strong earnings, CAGR. And that's the company that we are, and that hasn't changed. And as we work through the process with the Justice Department, it's going to be the same company when we come out of it from a financial profile, definitely. Steve, anything you want to add to the specifics on the liquidity question?

No, Chuck. Our liquidity is strong at $3.5 billion. We have access to it. We can make all the reps and warranties under the facilities and expect to be able to do that moving forward.

Understood. Just last question for me. Have you had dialogue with PUCO since this investigation was announced? And anything just to report on that side of things?

I have had no dialogue with the PUCO.

Our next question is coming from Paul Patterson of Glenrock Associates.

So as you know, there's discussion about repealing HB 6. And I'm just thinking other than the decoupling provision, is there any other significant or potential significant impact that would happen if it was repealed and not replaced? And also sort of likewise in the same area, since FES has emerged from bankruptcy, are there any contingencies or anything that we should think about that or obligations to FirstEnergy, I mean to whatever Energy Harbor since you guys -- since it's now out of bankruptcy, if you follow me.

All right. So the first question is, if House Bill 6 is repealed, what else happens. I mentioned it in my prepared remarks that House Bill 6 went into law actually resulted in a rate reduction for our customers despite the surcharges related to the nuclear plants. And that was as a result of some of the previous payments that were being made for customers for renewable energy charges. It would depend how it's repealed, how it's replaced, if at all, on what happens with those renewable energy surcharges on the decoupling piece. The decoupling provisions in House Bill 6 can have many benefits, it provides rate certainty for both customers and shareholders until our next base rate case. In the case of shareholders, it could provide a benefit depending on weather during a normal economic downturn but right now, as I've said, with loads up due to workers being at home from -- as a result of the pandemic, combined with hot weather, last month and this month, decoupling is actually providing a benefit to the customers. So if decoupling goes away, those are the types of benefits that are going to go away.

Okay. But any financial impact to you guys other than outside decoupling? I mean, I'm just thinking, like is there anything -- the decoupling thing is there. Other than that going away, is there any financial impact that we should think about potentially, again, absent decoupling that we should think about with?

Not anything that's significant nor that we could accommodate within our plan. It's a few pennies a share, probably maximum that it would benefit us. And as I said, if it's not there, the real risk is also shared by customers because they'd be paying a whole lot higher electric bills this summer than they're paying.

Okay. Great. And then just with FES post bankruptcy here, is there any contingency or obligations that you have to them?

No. There's no change in our settlement agreement with FES and its bondholders, creditors and all of the other parties. The plan of reorganization was not contingent on House Bill 6 or any other support for the nuclear plants. There's no true-ups, any other financial obligations from FE to FES, other than what was in our agreement that was approved by the court.

Okay. But that agreed. So that was -- okay, I guess what I'm saying is that should we -- if something happens to FES, should we be concerned about it having any potential impact on you guys since it's now emerged from bankruptcy, et cetera? Do you follow what I'm saying?

Well, the last I know, they were sitting on $900 plus million of cash. I don't -- I can't speak for what's going on out there. That was a public announcement they made back in March. I don't -- I'm not sitting here at all worried about that part of what used to be part of our company.

Okay. Appreciate that. And then just in general, I mean 82 pages of lots of information is put out there and obviously, some of it associated with the individuals that are arrested, I can see some sort of issue with. It's not clear to me what the actual, if any allegations that are actually being made about FirstEnergy in a legal manner, have been -- being done illegally, if you follow me.

I have, of course, not seen the subpoena, what have you. But how should we think about that, I guess, when we look at the…

I'm going to let my prepared remarks stand on that question.

Our next question is coming from Paul Fremont of Mizuho.

Basically, I just want to start by following up on Steve Byrd's question. If you were faced with the prospect of a potential rating downgrade by Standard & Poor's, would you alter your equity financing plans to defend the rating? Or would you allow for the rating to go down?

I think in the short term, we wouldn't do anything drastic. We wouldn't change our plan, and we would work to get them to the point where they're comfortable restoring our rating. As I said, the underlying financials of this company haven't changed. Our balance sheet is getting stronger. We're moving into the 12% to 13% range. S&P has a 12% threshold there. We're not going to go below that. If they were to downgrade as a result of this news, as I've said, that's our job to get this news behind us. And when that happens, I would expect them to restore the rating that's appropriate.

Got it. Were you aware of the investigation prior to the FBI's announcement and press conference this week? Or was that the first time that you became aware of the investigation?

I'm not going to comment on that one.

Okay.

It'd be really nice. We've got about 15 minutes left. If we could actually talk about the great quarter that we had at some point here.

I just have one more question. And I guess part of the affidavit alleges that there was a payment by you to one of the lobbyists. Is that incorrect that you made a payment to that lobbyist?

I would just say this. I think that the CEO reference in some of that affidavit wasn't me. I don't know who it was, but it was not me. And I made -- I've never made a payment directly to a lobbyist in my life nor asked any lobbyists to make a payment to anyone else on behalf of our company in my life.

Our next question is coming from Michael Lapides of Goldman Sachs.

I actually want to dive in -- I want to dive into something that is a bit regulatory-related and is Ohio-related, but it's something you deal with every year.

You have your 2019 significantly excessive earnings test application out there. And the 2018 one, I don't think, ever got ruled on. Your own data in the 2019 one shows a little over $300 million of net income at your Ohio distribution utilities on about not quite $4 billion of rate base. Just curious how you're thinking about, a, the process for resolving the last 2 seat tests; and b, the potential risk of, if any, of a rate reduction in Ohio as a result of the seat test? And is there a rate reduction, if any, happens, would that be a onetime kind of refund the customers? Or would that be an ongoing lowering of rates?

Michael, this is Jon. As you look at the seat test, we filed that back in May at 10.9% return on equity. The 2 biggest drivers in that there were some lower costs in '19 versus '18, lower interest cost. And then we had some one-off expenses in 2018 that we incurred.

But the bigger impact was that the Ohio utilities paid a dividend up to FE Corp. probably a little bit more than they have typically done in the past just because they hadn't paid a dividend in quite some time. So that was the key driver in the increase in the return on equity. I don't foresee any issues at the 10.9%. We're well below the thresholds. And I think that will be -- will resolve itself over some period of time. I can't remember the regulatory time frame. Maybe Eileen, if you want to talk through the regulatory time frame on when that gets approved or how the process works for the seat.

Yes. Thanks. Good morning. It's Eileen Mikkelsen, Vice President of Rates and Regulatory Affairs. Thanks, Jon. The process is, as you said, each year, we make a filing in May reporting on our prior year's earnings consistent with the statutory language with respect to the significantly excessive earnings test. At that time, we really wait for the Public Utilities Commission of Ohio to establish a procedural schedule for folks to provide comments on that seat filing and then make a determination of whether or not we need to move to hearings or not move to hearings before they make a judgment about whether or not we have significantly excessive earnings. But Jon, as you said, with the filing at 10.9%, we are not concerned that we have significantly excessive earnings in our Ohio utilities.

Okay. So does that mean -- are there any issues with the 2018 seat testers? Because I may be wrong, but I didn't think the commission had actually issued an order one way or the other on that it just seems a little unusual for the '18 one to be outstanding still when the '19 one got bought.

There is no procedural schedule established as yet for resolving the 2018 seat proceeding. So we await the establishment of a procedural schedule, and then we will act accordingly. But again, that 2018 framing was 8.8% and so on a consolidated basis. So again, no concerns that we have significantly excessive earnings in Ohio in 2018.

Our next question is coming from Sophie Karp of KeyBanc Capital Markets.

Just maybe if you guys could provide a little bit more color on your conversations with rating agencies. And just trying to understand a little better what exactly their concerns are as they were communicated to you because like you pointed out, fundamentally, the business -- the underlying business is on the right trajectory and remains strong. Just curious what is it they are afraid of?

I don't have any more color to provide. I pretty much shared everything that I discussed with them. And I think you'd need to read what they wrote and call them if you have more questions.

All right. And then secondly, if I may quickly follow-up. You went through a regulatory president to establish the decoupling mechanism. So presumably, if that was reversed, you would have to go to that similar position again. And my question is, would that, in any way, trigger a full rate review in your opinion?

Okay. There wasn't a full rate review to implement decoupling. And I would hardly think that there would be one to deimplement decoupling.

Our next question is coming from Durgesh Chopra of Evercore ISI.

Just really quickly first on Q3 guidance. Any comment on what you're assuming in terms of COVID impacts, clearly, things in Q2 tend to be trending better than where you were at least the Q1 call?

Durgesh, this is Jon. I think if you look at the second quarter load on a weather-adjusted basis, you were down 4%. Residential was up 15%. Commercial was down 15%. Industrial was down 12%. I think you could probably assume the total 4% load reduction off the prior year will be consistent, but my sense is the mix will be different. We're starting to see residential come down slightly. We're starting to see commercial improve slightly and industrial improved slightly. So I think the mix will be different, but the load in terms of just total low versus last year, will be fairly consistent with what we saw in the second quarter. With respect to COVID-related costs, we have the deferral mechanisms on uncollectible expenses and all that's been recorded up to what we have in base rates. So I don't anticipate any issues there. And the other COVID costs that we're incurring in the main, they're not that significant. So I don't anticipate any impact from COVID in the third quarter.

Understood. And then just, Chuck, quickly, going back to FES liabilities. I just want to make sure I understood that clearly. So as I recall through the bankruptcy proceeding, you have some obligations on specifically nuclear decommissioning and coal ash, if FES were to get any kind of financial trouble. Are you saying that you're okay with where those trust balances are that you're comfortable in that whole situation? I'm just trying to understand that will those obligations be FirstEnergy obligations if FirstEnergy's situation does get into any kind of financial trouble or no?

Durgesh, you have -- you do not understand correctly. We have no obligations for nuclear decommissioning. We have no direct obligations for any coal ash. We put in place a surety bond as part of our agreement that we negotiated with FES to ensure the coal ash mitigation happens properly.

But that was -- that bond is in place, and it was part of our separation agreement that was approved by the bankruptcy court, and we have no other ongoing financial obligations.

Our next question is coming from Andrew Weisel of Scotiabank.

And I will say, congratulations on a good quarter. If I can just elaborate on the seat, and more specifically, you disclosed the earned ROE of 10.9% in Ohio for 2019 but when I look at the net income of the subsidiaries, subtract out the DMR and just do the simple algebra, it points to something significantly higher, like north of 20%. Can you just help me reconcile those numbers and why it seems like a pretty big disparity between the 10.9%? And what the net income from those subsidiaries look like?

Yes. So this is Jon. So I think the -- what you see in our Ohio utilities financial statements and what's included in seat. Obviously, we start with what's in the financials, but there are exclusions per the regulations and adjustments that you need to make in order to calculate the seat. And so I don't have the list of adjustments on the top of my head here and probably wouldn't be a good use of time to go through every single adjustment on the call. But there are certain adjustments that we make, not only in the income that's reported by the utilities, but also in the equity that's reported by the utilities. It is a rolling 13-month average equity balance that's used to calculate the 10.9% or the 8.8% in the previous year. So there are some adjustments that we would just need to walk through, and we could do that off-line if that makes sense.

Could you maybe just give one or 2 of the biggest still? I mean you're talking about like a doubling of net income versus what the dumb guy math would imply.

It's Eileen. Thinking of the adjustments, like Jon, we can take this offline. But coming to mind for example, Ohio Edison has Penn Power as a subsidiary. So we have to adjust Penn Power out because that is not relevant to the Ohio rate making formula. So there's things like that, that are included that are necessary adjustments in order to meet the statutory test.

Our last question this morning is coming from Charles Fishman of Morningstar.

Yes. Chuck, I was skeptical, your revenues would be as resilient as they were, so with respect to COVID-19 after the last quarter, but they certainly were this quarter. So I'll give you that addable on the quarter.

Thank you. Charles, and also, I saw you quoted in some of the media earlier this week. Thank you for the vote of confidence.

Okay. You're welcome. Okay. So since I did that, I forgot just one quick question on Ohio. The DCR, can that be opened up as far as the ROE or are we pretty much on autopilot until the ESP expires in '24?

Eileen will take that.

Thanks, Chuck. With respect to DCR in Ohio, I would agree, we are on autopilot through the end of our ESP, which is currently in effect through May of 2024.

Thank you, Charles. All right. Thank you all for your support. Thanks for at least getting a few questions on the quarter. We'll talk to you again when it's appropriate. Take care.

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