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FirstEnergy Corp (NYSE:FE)
Q2 2020 Earnings Call
Jul 24, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the FirstEnergy Corp. Second Quarter 2020 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Ms. Irene Prezelj, Vice President of Investor Relations. Thank you. You may begin.

Irene Prezelj -- Vice President, Investor Relations

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 Investor 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 will turn the call over to Chuck.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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 four 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 behaviour 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 two 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 zero 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 a 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 conscientious 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 transitioned 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 have 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 crews sizes.

I'm pleased to note that this increased focus on protections from COVID has extended beyond the virus and helped to drive a stronger overall safety performance for our company through the first six 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 close, 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 two-thirds 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% systemwide 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 are taking 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 are affirming our 2020 operating earnings guidance range of $2.40 to $2.60 per share.

We are 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 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.

Steven E. Strah -- President

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 scheduled 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 continued 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 will turn it over to Jon Taylor for the financial review.

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

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 non-deferred 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 were 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 spend 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 continued 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 de-risk the [plans'] asset allocation and anticipation of additional market volatility with the goal of preserving the plans' year-to-date asset returns and to protect the plans' funded status which remains unchanged at 77%.

Finally, in June, we successfully completed the refinancing of $750 million in 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 remained 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 two transactions remaining in 2020 totaling $250 million and only four 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.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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.

Questions and Answers:

Operator

Thank you. The floor is now open for questions. [Operator Instructions] Our first question today is coming from Steve Fleishman of Wolfe Research. Please go ahead.

Steve Fleishman -- Wolfe Research -- Analyst

Hi, good morning.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Good morning, Steve.

Steve Fleishman -- Wolfe Research -- Analyst

Hi, Chuck. Can't help but asking so, as best you can answer, 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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Well, first, let me take the second half first, and as of November of 16, when we essentially made the competitive generation business non-core, 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 two companies, as it relates to transition-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.

Steve Fleishman -- Wolfe Research -- Analyst

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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

No, I'm not going to talk to that. I talk to a lot of people, I text with 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 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.

Steve Fleishman -- Wolfe Research -- Analyst

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 HB 6?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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.

Steve Fleishman -- Wolfe Research -- Analyst

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

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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 being spent on both sides and 501(c)(4)s were used on both sides.

Steve Fleishman -- Wolfe Research -- Analyst

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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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.

Steve Fleishman -- Wolfe Research -- Analyst

Great. Thank you very much. Appreciate it.

Operator

Thank you. Our next question is coming from Shar Pourreza of Guggenheim. Please go ahead.

Shar Pourreza -- Guggenheim -- Analyst

Hi, good morning guys.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Hi, Shar.

Shar Pourreza -- Guggenheim -- Analyst

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 is 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 non back-ended functions actually split?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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 cease 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, its bondholders, its creditors. There is 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.

Shar Pourreza -- Guggenheim -- Analyst

Got it. And then, several of sort of the individuals charged are longtime lobbyist 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 specific what their affiliation was with both A and A1, for example, individual appears 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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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 lobbyist 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.

Shar Pourreza -- Guggenheim -- Analyst

Got it. And then, Chuck, just one last question, and just to follow-up on Steve's on the 501(c)(4), what was like the underlining vetting process for [Phonetic] 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 toward the 501(c) would be used for like code on societal benefits [Phonetic] versus political aspirations?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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

Shar Pourreza -- Guggenheim -- Analyst

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

Operator

Thank you. Our next question is coming from Julien Dumoulin-Smith of Bank of America. Please go ahead.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Hi, good morning, team. Thank you for the time. At risk of delving into the obvious again, if I can follow on Shar's line of questioning, on the services arrangement, I just want to understand the historical setup here. You know, 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 [Phonetic], 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 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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

External Affairs was one of the areas that they separate it 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 lobbyist. 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.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Right. So to the extent that you are [Phonetic] running a services arrangement for them in other facets for a longer duration, including seemingly through some for 2020, it's specifically in the context of External Affairs, which would presumably include lobbying, that seems to have terminated very quickly [Speech Overlap]?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Yes, I think you should think about it more in terms of Administrative Affairs that we were providing them, payroll, HR services, some, you know, financial services, IT services, those types of things we were providing. You know, 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.

Julien Dumoulin-Smith -- Bank of America -- Analyst

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, 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)s?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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 spent it on this call.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Understood. Last question for you super quick. I know you've articulated your own plans about transition of the management team, and that was obviously [Indecipherable]. How do you think about your [Technical Issues]?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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

Julien Dumoulin-Smith -- Bank of America -- Analyst

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

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Well, to my knowledge, I've never articulated anything that 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 -- I'm not going to -- you know, not going to -- not do my part to help restore the reputation of this company to what it duly [Phonetic] deserves.

Julien Dumoulin-Smith -- Bank of America -- Analyst

Absolutely. Alright. All the best. Good luck.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Thank you, Julien.

Operator

Thank you. Our next question is coming from Stephen Byrd of Morgan Stanley. Please go ahead.

Stephen Byrd -- Morgan Stanley -- Analyst

Hi, good morning.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Hi, Stephen.

Stephen Byrd -- Morgan Stanley -- Analyst

Just wanted to talk about FES and governance there, was there any FirstEnergy executives on the board of FES post 2016?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Excuse me, say that again, Stephen.

Stephen Byrd -- Morgan Stanley -- Analyst

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

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

No, FirstEnergy executives were on the Board of FES.

Stephen Byrd -- Morgan Stanley -- Analyst

Okay, thank you. And then just another question.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

The 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.

Stephen Byrd -- Morgan Stanley -- Analyst

Understood. Thank you. 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 confident 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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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.

Stephen Byrd -- Morgan Stanley -- Analyst

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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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. You know they put us on a 90-day negative watch. You know, 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 executive teams 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?

Steven E. Strah -- President

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.

Stephen Byrd -- Morgan Stanley -- Analyst

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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

I have had no dialogue with the PUCO.

Stephen Byrd -- Morgan Stanley -- Analyst

Understood. Thank you very much.

Operator

Thank you. Our next question is coming from Paul Patterson of Glenrock Associates. Please go ahead.

Paul Patterson -- Glenrock Associates -- Analyst

Hi, good morning.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Hi, Paul.

Paul Patterson -- Glenrock Associates -- Analyst

So, as you know, there is discussion about repealing HB 6. 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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Alright, so the first question is if House Bill 6 is repealed, what else happens? I mentioned in my prepared remarks that House Bill 6, when it went into law, actually resulted in a rate reduction for our customers despite 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, you know, decoupling provisions in the 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 whether during a normal economic downturn, but right now, as I've said, with loads up due to workers being at home 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, you know, if decoupling goes away, those are the types of benefits that are going to go away.

Paul Patterson -- Glenrock Associates -- Analyst

Okay, but any financial impact to you guys other than outside of 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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

No, not anything that's significant nor that we could accommodate within our plan. It's a few pennies of 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.

Paul Patterson -- Glenrock Associates -- Analyst

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

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. But that was -- 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 etc., do you follow what I'm saying?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Well, the last I know, they were sitting on $900 plus million of cash. I don't -- you know 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.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. Appreciate that. And then, just in general, I mean, 82 pages of lots of [Phonetic] information is put out there and obviously some of it is 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, nothing to subpoena or what have you [Phonetic], how should we think about that? I guess, when we look at the..

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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

Paul Patterson -- Glenrock Associates -- Analyst

Okay. Again, thanks so much. Hang in there [Phonetic].

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

All right. Take care.

Operator

Thank you. Our next question is coming from Paul Fremont of Mizuho. Please go ahead.

Paul Fremont -- Mizuho -- Analyst

Thank you. Basically, I just want -- I 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 descend the rating or would you allow for the rating to go down?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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.

Paul Fremont -- Mizuho -- Analyst

Okay.

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

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 us as a result of this news, as I've said, it's our job to get this news behind us and when that happens, I would expect them to restore the rating that's appropriate.

Paul Fremont -- Mizuho -- Analyst

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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

I'm not going to comment on that one.

Paul Fremont -- Mizuho -- Analyst

Okay.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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

Paul Fremont -- Mizuho -- Analyst

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?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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'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.

Paul Fremont -- Mizuho -- Analyst

Great. That's it for me. Thank you.

Operator

Thank you. Our next question is coming from Michael Lapides of Goldman Sachs. Please go ahead.

Michael Lapides -- Goldman Sachs -- Analyst

Hi, guys, thank you for taking my question. I actually want to [Speech Overlap] thank you, Chuck. 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 next year at your Ohio distribution utilities on about not quite $4 billion [Phonetic] of rate base. Just curious how you're thinking about, a, the process for resolving the last two 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, happened? Would that be a one-time kind of refund to customers or would that be an ongoing lowering of rates?

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

Hi, Michael, this is Jon. As you look at the seat test, we filed that back in May, 10.9% return on equity. The two 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.

Eileen Mikkelsen -- Vice President, Rates and Regulatory Affairs

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.

Michael Lapides -- Goldman Sachs -- Analyst

Okay. So, does that mean, are there any issues with the 2018 seat test, 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 [Phonetic].

Eileen Mikkelsen -- Vice President, Rates and Regulatory Affairs

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

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Thank you, guys. Much appreciate it.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Take care, Michael.

Operator

Thank you. Our next question is coming from Sophie Karp of KeyBanc Capital Markets. Please go ahead.

Sophie Karp -- KeyBanc Capital Markets -- Analyst

Hi, good morning and thank you for taking my questions. Just maybe if you guys could provide a little bit more color on your conversations with the rating agencies and just try to understand a little better what exactly their concerns are, as they were communicated to you because like you pointed out, fundamentally the business, underlying business is on the right trajectory and remain strong, just curious what is it that they afraid of? Thank you.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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

Sophie Karp -- KeyBanc Capital Markets -- Analyst

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 proceeding again. And my question is, would that in any way trigger a full rate review in your opinion? Thank you.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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

Sophie Karp -- KeyBanc Capital Markets -- Analyst

Alright. Thank you.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Thank you, Sophie.

Operator

Thank you. Our next question is coming from Durgesh Chopra of Evercore ISI. Please go ahead.

Durgesh Chopra -- Evercore ISI -- Analyst

Hi, guys, good morning. Thank you for taking my question. 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?

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

Hi Durgesh. This is Jon. I think, you know, if you look at this 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 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 improve slightly.

So, I think the mix will be different, but the load in terms of just total load 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.

Durgesh Chopra -- Evercore ISI -- Analyst

Understood, thanks. And then just Chuck, quickly, going back to FES liabilities, I just wanted 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 in any kind of financial trouble, are you saying that you're OK with where those stress 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 situation does get into any kind of financial trouble or no?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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 happened properly, but 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.

Durgesh Chopra -- Evercore ISI -- Analyst

Understood. Thank you. Thank you for that clarification. Appreciate it.

Operator

Thank you. Our next question is coming from Andrew Weisel of Scotia Bank. Please go ahead.

Andrew Weisel -- Scotia Bank -- Analyst

Thanks for taking my question and I will say congratulation on a good quarter.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Thanks.

Andrew Weisel -- Scotia Bank -- Analyst

If I can just elaborate on the seat and more specifically, you've 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% [Phonetic], and what the net income from those subsidiaries look like?

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

Yes. So, this is Jon. So, I think what you see in our Ohio utilities' financial statements and what's included and see, 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 offline, if that makes sense.

Andrew Weisel -- Scotia Bank -- Analyst

Could you maybe just give one or two of the biggest still? I mean, you're talking about like a doubling of net income versus what the dumb guide math would [Phonetic] imply?

Eileen Mikkelsen -- Vice President, Rates and Regulatory Affairs

It's Eileen. Thinking of the adjustments like Jon, we can take this offline, but coming to mine 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.

Andrew Weisel -- Scotia Bank -- Analyst

Okay, thank you.

Operator

Thank you. Our last question this morning is coming from Charles Fishman of Morningstar. Please go ahead.

Charles Fishman -- Morningstar -- Analyst

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 [Phonetic] the quarter. And then..

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

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

Charles Fishman -- Morningstar -- Analyst

Okay, you're welcome. Okay, so since I did that, I forget just one quick question on Ohio. [Speech Overlap] the DCR, can that be opened up as far as the ROE, are we pretty much on autopilot until the ESP expires in 2024?

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Eileen will take that.

Eileen Mikkelsen -- Vice President, Rates and Regulatory Affairs

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.

Charles Fishman -- Morningstar -- Analyst

Okay. Thanks a lot. That's all I have.

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Thank you, Charles. Alright. 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.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Irene Prezelj -- Vice President, Investor Relations

Charles E. Jones -- Chief Executive Officer, Member, Board of Directors

Steven E. Strah -- President

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

Eileen Mikkelsen -- Vice President, Rates and Regulatory Affairs

Steve Fleishman -- Wolfe Research -- Analyst

Shar Pourreza -- Guggenheim -- Analyst

Julien Dumoulin-Smith -- Bank of America -- Analyst

Stephen Byrd -- Morgan Stanley -- Analyst

Paul Patterson -- Glenrock Associates -- Analyst

Paul Fremont -- Mizuho -- Analyst

Michael Lapides -- Goldman Sachs -- Analyst

Sophie Karp -- KeyBanc Capital Markets -- Analyst

Durgesh Chopra -- Evercore ISI -- Analyst

Andrew Weisel -- Scotia Bank -- Analyst

Charles Fishman -- Morningstar -- Analyst

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