Chuck Jones - President, Chief Executive Officer Steve Strah - Senior Vice President, Chief Financial Officer Jason Lisowski - Chief Accounting Officer Eileen Mikkelsen - Vice President of Rates and Regulatory Affairs Irene Prezelj - Vice President, Investor Relations

Greetings! And welcome to the FirstEnergy Corp, Fourth Quarter 2019 Earning Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Irene Prezelj, Vice President, Investor Relations for FirstEnergy Corp. Thank you Ms. Prezelj, you may now begin.

Thanks Doug. Welcome to our fourth 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 Chuck Jones, President and Chief Executive Officer; Steve Strah, Senior Vice President and Chief Financial Officer; and several other executives in the room who are available to participate in the Q&A session. Now, I’ll turn the call over to Chuck.

Thank you, Irene, and good morning everyone. Thanks for joining us. 2019 was another great year and a step forward for FirstEnergy, marked by solid execution on initiatives that benefit our customers, shareholders, communities and our company. One of the accomplishments that makes us most proud is our record of delivering on the commitments we made to the financial community. This morning we announce 2019 GAAP earnings of $1.70 per share and operating earnings of $2.58 per share, which is at the top-end of the guidance range we provided on our last earnings call. By executing on our customer focus growth strategy, along with some benefits from third quarter weather, we successfully mitigated the absence of the Ohio Distribution Modernization Rider in the second half of the year. We reached five years of consistently meeting or exceeding the mid-point of the quarterly guidance that we provided. The culture of execution and ownership that our leadership team has established at FirstEnergy is one you can continue to count on as we improve service for our customers and communities and deliver strong results for our shareholders. Two years ago we introduced our first long term growth rate projection of 6% to 8% compounded annually from 2018 to 2021. In the first year we hit it out of the park. Our 2019 growth versus our original 2018 guidance was 12%, excluding both the Ohio DMR and weather impacts. Our culture of strong execution is clearly evident and has gotten us off to a great start, on what now is a five year growth plan, and we're looking forward to another solid year in 2020 as we reaffirm our operating earnings guidance of $2.40 to $2.60 per share. I continue providing investors with clarity into our long term expectations for earnings growth. In November…

Good morning; it's great to speak with you today. All reconciliations and other detailed information about the quarter are available in the strategic and financial highlights document that is posted to our website. We also posted and updated fact book to the website this morning, which includes additional supporting materials related to 2022 and 2023, such as our capital in load forecasts. Now let's review our results. We reported a fourth quarter GAAP loss of $0.20 per share, driven by our annual non-cash pension and OPEB mark-to-market adjustment. I'll spend a few minutes discussing our pension performance later in my comments. Adjusting for special items, fourth quarter operating earnings were $0.55 per share, which is above the mid-point of the guidance we provided on our last earnings call. In the distribution business, earnings were flat compared to the fourth quarter of 2018. O&M expenses were lower this quarter compared to the same period in 2018 and distribution revenues were higher. This offset the absence of the Ohio DMR and the impact of more mild temperatures across our footprint. Total distribution earnings increased due to incremental writer revenue in Ohio and Pennsylvania, but customer usage decreased compared to the fourth quarter of 2018 on both an actual and weather adjusted basis. Heating degree days were 2% below normal and 7% lower than the fourth quarter of 2018. Residential sales were down 1.3% on an actual basis compared to the fourth quarter of 2018, but increased slightly on a weather adjusted basis. In the commercial customer class, fourth quarter sales decreased 4.3% on an actual basis and 3.5%, when adjusted for whether compared to the same period in 2018. Finally in our industrial class, fourth quarter loads decreased 2.4%. While the shale gas sector continues to grow, we saw our sales decline…

Thank you. [Operator Instructions]. Our first question comes from the line of Greg Gordon with Evercore ISI. Please proceed with your question.

Hey, thanks. Congrats on a good year guys.

Good morning Greg.

A couple of questions. Looking at the cash flow disclosure you gave, there's some changes relative to what the outlook looked like in the last fact book, but I guess when I unpack it, it looks like the major changes, just the delay in the cash payment to the FES creditors and a decision to pay them out in cash rather than take on that tax note associated with the prior settlement. So can you just walk through – I know the former is just timing, but the decision making on the latter and why you see that as value accretive?

Hey Greg, it’s Steve Strah. So the way you’ve explain it is exactly what happened. We were planning to make the payment in 2019, assuming an FES emergence at that point, but obviously that didn't happen. It's going to happen here sometime in February, at which point in time we will fund the cash payment of $225 million and we will also pay what we were previously thinking would be issued as a tax note, we will also pay that tax note in cash. And so from an economics perspective it just makes more sense for us to use cash-on-hand to pay-off that tax note now, rather than have to deal with it by the end of 2022 and refinance it again at that point.

And I'll just emphasize that point, that means we won't be answering questions about FES for the next five years so.

No, we're all happy about that. Two more questions; as it pertains to just you know obviously a lot of moving parts when you think about the ‘22 and beyond equity, potential equity needs, you've set up to $600 million. But one of the pieces that looks like its gotten better is, pension performance means future pension contributions are down by a little over $300 million. So all things equal, does that mean that your equity needs are down by potentially up to $300 million?

Well, I would say this, we put a range in there that allows for flexibility for lots of things to change between now and then. The range of zero to 600, including the drip is a range that we expect to stay in. I don't think it should be extracted that it will be $600 million every single year, but it will be within that range, depending on where we are at when we get to that point.

Right, that’s a fair enough answer. My final question is, I know this has no direct economic impact on your – definitely it has an impact on your customers. What do you think the Ohio government's response is going to be to the FERC decision on the MOPR rules with regard to, the capacity market? Is it possible that the state of Ohio will consider leaving PJM throughout FRR?

I would say that the state of Ohio has already kind of talked about their disappointment with the PJM market, and their intention to use the next year or so to look at energy policy for the state. The last time they looked at energy policy in the state was 20 years ago, 1999, when the Senate Bill 3D regulated the state. I think there's a lot of disappointment that some of the goals they thought would be achieved through that, never materialized. I think there were some unintended consequences that happened that they didn't expect to happen and so I think they're going to fully look at everything, from how the utilities interact with the public utilities commission to you know how we insure a long term secure supply of generation for Ohio customers, to how we get back to Ohio being a state that has an energy surplus as opposed to a shortfall. I think there's a lot of things they are going to look at, but beyond that, you know what our intention is, is we’ll be at the table helping where they want help, providing our guidance where they want guidance, and expressing our views where we feel strongly about certain things should go a certain way.

Do you feel strongly about FRR one way or the other?

I don't, I'm not in the generation business anymore, so – but I feel strongly that we need to come up with a long term solution for customers that ensures they have adequate, fuel secure, cost effective generation, not just right now. And I mean its no – my views on these markets has not changed. A one your capacity signaled three years out and the next hourly short run marginal cost signal is no way to do this business for the long haul and they are failing. And so something needs to be done, whether Ohio decides to step up and do something, is up to them, but I do not think the market as constructed today is going to provide the best long term outcome for my customers.

Thank you.

Our next question comes from a line of Praful Mehta with Citigroup. Please proceed with your question.

Thanks so much. Hi guys!

Hi Praful.

Hi, so maybe just firstly clarify something more specific, on page 11 you have regulatory charges for the fourth quarter in the distribution business, which is being adding – which is adding back about $0.15 of earnings to get to more operating earnings. What specifically does that $0.15 relate to?

Yeah Praful, this is Jason Lisowski, Chief Accounting Officer. That is related to a FERC order that reallocates some transmission expenses across our utilities. And as you may recall, in Ohio we at the time in the past did not have the ability to pass those on to customers. So it ended up being actually a refund and a credit back to the wild companies, and since in the past we were excluding them from our non-GAAP operating earnings, when you receive that credit, we consistently also exclude it from our non-GAAP operating earnings.

I got you. That’s helpful, thank you. And then in terms of longer term growth, the ‘21 to ‘23 earnings profile based on the group that you've talked about looks like a 4.5% earnings growth, if I just were to use the math for the last two years. I'm assuming some of that is obviously a slower rate base growth and then the equity need. Can you just walk through or help us understand what kind of rate base growth you're assuming for the last two years in the current forecast and like how much dilution, you expect versus strong rate base to EPS.

Well, I'll answer this. That CAGR that we’ve given you have for the next five years is the CAGR that we expect to hit, which is 6% to 8% for the first three and then 5% to 7% after that. I’ll let Jason try to walk you through the rate base accounting that gets to that, but as I've told you many times, when you look at our company from the outside in, trying to line-up what you look at with the regulatory accounting that goes on, because it's no longer just the same simple math that it used to be. It’s difficult, but we'll have Jason try.

Yeah, if you look at the fact book that we released this morning, we actually do show our expected rate base growth, both separately for the regular distribution and regulate transmission, through 2023 broken down by each state. And you will see that in 2022 and 2023 there is no growth, but that growth does slow down a little bit.

Okay, fair enough. I'll dig through that little bit more and discuss that. And then just finally on the equity needs point, I understand that clearly the pensioners helped, so that should help reduce the equity needs a little bit. I wanted to understand in terms of balancing other goals right around leverage, holdco debt what are the key guide post that we should be thinking about as you think about the equity up to 600, what could have bring it down apart from pension, what could kindly to lead to pushing it up, just few of those guide posts would be helpful.

Well, obviously 1 thing that could help bring it down is if we eventually see some reasonable low growth throughout our footprint. Just a little bit a low growth can have a huge impact. We give a range for a reason. I mean what – the performance of the pension plan can continue to affect what's needed there. You know it's – you know I wasn't trying to dodge Greg's question, I can't sit here today and tell you how much equity we're going to recommend we issue in 2022, ‘23, ‘24. It's not going to be more than $600 million, I can confidently say that.

Got it. I really appreciate it guys. Thank you.

Our next question comes from a line of Julien Dumoulin-Smith with Bank of America Merrill Lynch. Please proceed with your question.

Hey, good morning team.

Good morning Julian.

Hey. So perhaps just to pick up on a slightly different state and angle, can you talk a little bit more about New Jersey and the energy masterplan here and specifically, how do you see opportunities emerging from that and/or some of your peers and their respective clean energy filings in parallel. I'm thinking you know AMI or otherwise. And then as well, can you touch on some of the commentary in the EMP with respect to reduction or a meaningful reduction in gas and obviously you guys aren’t gas, but conversely how do you think about the electrification implications that seem to be pretty clear in the EMP as well. So perhaps touch holistically on the New Jersey business given everything going on if you don't mind.

Okay, well, there’s a lot in that question. I was just over in New Jersey last week. I met with three of the BPU commissioners. I met with the Governor and his policy team, the afternoon after he rolled out the energy masterplan, so I had a lot of opportunity to talk with him and his team in particular about how I think our company can help him be successful with it. I think there are opportunities for us to help particularly in the electric vehicle area if the state decides to embrace utilities investing and you know building out a robust charging network throughout the state. You know, I think advanced metering is something the state has to decide what their policy is on, but we've got a lot of experience now in Pennsylvania with nearly 2 million meters there and we're going to be rolling out a 0.25 million in Ohio. So what I offered is, we'll come to the table and help them understand the pros and the cons, because there are both that we see, to help them make an informed decision on that. I was very honest with him that I have no intention to get into investing in offshore wind. That's not something I see us taking on at this point in time. I talked with him about transmission and I know the BPU President made some comments about transmission, so I might as well just address those here, because I know I'm going to get a question. You know his comments were specific to the network transmission service charges in the BGS auction for one company and that company was not us by the way. I saw what happened in the market with our stock yesterday after his comments became public. I think…

But just to clarify on that, could this be incremental capital? I know you guys talked about a very specific and committed equity capital plan and financing plan through the forecast period, but I just also hear your comments about you know helping the city of New Jersey here too.

The reason we have a range in this CapEx plan that we've communicated is so that we have the ability to have flexibility to move it around state-to-state, transmission-to-distribution. I'm not going to sit here and tell you that we're going to add incremental capital beyond the range that we've given you, and the range that we're giving you is got a couple of control rods in it. One is our customer's ability to pay and a constant awareness of the fact that without load growth these are going to be rate increases for customers and we have to be careful with that, and the other control rod being the balance sheet and managing the amount of equity that we are ultimately going to do to maintain our credit where we want it and get to that goal of begin BBB rated with all three agencies. So we're going to use this range that we have to satisfy what we're going to execute from a work plan in all five states. I'm not planning to change that range in the near term.

Alright, great. Well, best of luck. Thank you.

Thanks Julian.

Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.

Hey guys, thanks for taking my question. Chuck, you only really owned kind of regulated generation in one state, West Virginia. Just curious how you're thinking about kind of the potential for kind of changes to the generation fleet, the composition of the generation fleet, maybe especially since the state kind of sitting on the Marcellus shale whether the economics makes sense for the company and the customer to add a little bit more gas fired generation into the regulated mix there. And then obviously, is there a need for kind of an uptick in either renewable or even kind of smart grid [ph] on the distribution side CapEx in West Virginia.

In West Virginia the process is real simple. We're going to file an integrated resource plan in West Virginia by the end of this year. We'll share our ideas with West Virginia about where we see their capacity needs being, some thoughts on how to meet that, but those decisions are going to be made in conjunction with the state of West Virginia and you know I think that there are opportunities to embrace what's going on with the shale development and they are capitalizing on it with a lot of industrial growth in that state in terms of collection and compressing and so forth. Whether they want to capitalize it in terms of generation sources, that remains to be seen and I don't want to speak for the state of West Virginia, but up until now at least, they haven't been real welcoming to renewables there, but you know from a FirstEnergy perspective, as we get separations from this whole FES issue and put that behind us, I think investment in renewable generation in a regulated context is something that we need to be thinking about adding to our portfolio, not deregulated in any fashion. We worked so hard to get to this company that I just said. It’s a T&D company’s low risk, no exposure to markets, that's where we want to stay. Any generation we might invest in is going to be earning a regulated rate of return just like those two plants in West Virginia do.

Got it. One other question, totally unrelated. Just curious, can you – what's embedded in guidance in terms of kind of O&M growth rates across the distribution business and also at the corporate level?

What’s embedded in our guidance is keeping O&M flat over that period, and so what I've challenged the team to do is to get more efficient at how we deliver service to customers. We’re in the process of rolling out an innovation center of FirstEnergy. We've got a number of employees who have earned black belts in innovation engineering. We're going to put them all into one group. We're going to use that group to help drive innovation throughout this company as a way to make us more efficient and offset the annual – you know we give a 3 in it this year, a 3.5% wage increase on the average to our employees, you know about half of which ends up O&M. You know we've got to find a way to offset, but what's in the guidance period is flat O&M throughout that period.

Got it. Starting off of 2019 base or starting off 2018 base, was there anything unusual in 2019?

Starting off of the – when we finished FE tomorrow and finished dealing with our corporate costs, which by the way our T&D costs are bottom decile as far as O&M and our corporate costs are bottom quartile in terms of low being good in both cases. So we've got this company very lean and we expect to keep it that way throughout this period.

Got it. Thank you, Chuck. Much appreciated.

Thank you.

Our next question comes from the line of Charles Fishman with Morningstar Research. Please proceed with your question.

Yeah Chuck, 90% of your transmission now, in that one slide you showed was formula based, forward looking. And what gets you to that last 10%? Is it a process similar to what we saw in New Jersey and what's the timing on that do you think?

Well its – what’s left, that is not forward looking formula rates is the former Allegheny system, and yes, the process would be to either eventually merge that into one of our existing Transcos or form another Transco, but the timing is what is such that we’ll do that when it makes the best sense in terms of there will be a crossover point where the investment returns, you know more returns to shareholders in a forward looking formula rate than it does in a stated right. Right now the stated rate is better for all of you.

Okay. And then second question, when we last talked in November, you hadn’t finished the planning process and you wanted to hold off on guidance till ‘23. As you wrapped up that process, in your mind was there anything that – I don’t know, surprise is probably a too strong of a word, but maybe was a little different than you thought as you wrapped up that process?

No, not at all. I mean, I think it's very difficult to predict the future five years out, though a lot of what we had to get comfortable with in that planning process is what's the world going to look like, not today, but what's the world going to look like in 2023; you know what's going to happen with inflation, what's going to happen with growth, etcetera, etcetera and bracket those types of things. One thing I can tell you I am confident in is that we're going to execute on the plan that we put out to this company and if it's $3.2 billion or $3.3 billion or $2.9 billion, it's going to deliver the results that we intend to deliver, and by getting to the point where more than 60% of all of it is in formula rates. It’s very transparent and easy to calculate, and where we need to have rate cases, we're going to have them, just as I said. We’re going to file a rate case probably this month in New Jersey to get that trued up and recover some storm costs that you know we've deferred up until now, so our ability to execute on rate cases, we demonstrated we can do that too, but it was just really more getting comfortable with a range of outcomes that could happen between now and then, to get comfortable with the CAGR and get comfortable with the equity assumptions, both.

Okay, that’s all I had. Thank you.

And the only other thing I've added and I said this repeatedly at EEI, I'm not going to tell you something until I know. The engineer in me is still in there. We got to have the plan and we got to have the numbers work and I know we can execute on it, which is why I was probably a little slow in getting to a five year CAGR, but that's also what results in five straight years now, meeting or exceeding every single quarter that we've given you guidance.

Our next question comes from the line of Andrew Weisel with Scotiabank. Please proceed with your question.

Hey, good morning everybody.

Good morning.

My first one, I just want to follow up on the New Jersey questions earlier. I believe in the CapEx outlook, do those forecasts include some level of spending related to things that were covered by the energy masterplan like energy efficiency, EV’s, AMI and will those buckets be part of the upcoming JCP&L rate case filing or would they come later in a separate compliance filings or something like that?

No, they don't include anything for that. Right now it's about $175 million in transmission. You know what the IIP is. We're going to round out the first round of IIP and at some point in time hopefully you'll see IIP 2 just like you saw LTIIP II in Pennsylvania. And when that comes again, that's why we have a range of CapEx, so that we have the ability to have flexibility from state to state and T2D.

Okay. So that would be upside to the current numbers, if they were to be spending on that?

Might be upside in New Jersey, but it would probably come away from somewhere else. I mean you can count on the capital plan being what I've told you it is, and we're going to get the CAGR that I've told you we're going to get, but the pieces and parts of it may move around from state to state.

Got it, that's helpful. And then last, this is just kind of a small one, but in Pennsylvania, congratulations on getting the LTIP 2 approved in full. My question is on the DSIC Rider, the benchmark ROE was just reduced by 10 basis points I believe yesterday to 9.45. Does that apply to your subsidiaries? And if so, can you give any sort of earnings sensitivity? I know this just came out yesterday, so it didn't give you a whole lot of time, but any thoughts on that?

Eileen's on top of it.

Good morning. It's Eileen Mikkelsen, I'm Vice President of Rates and Regulatory Affairs. Thank you, Chuck. Yes, we are aware that the PaPUC reduced the benchmark for the ROE in Pennsylvania yesterday to 9.45. Where that benchmark is used is really relates to our DSIC calculation and four utilities that have not had a base rate case in the last two years. They substitute that ROE benchmark number into their calculation when they calculate their DSIC revenues. So for our four distribution utilities in Pennsylvania, going forward we’ll use in our return calculations a return on equity of 9.45%, rather than the 9.55% that we've been using in the past, which really is the 10 basis points across those DSIC calculations, immaterial change to the revenues that we’ll collect under those riders. The second thing that ROE benchmark is used for is really a customer protection to say to the extent that the utilities have earnings in excess of that benchmarks that they report in their quarterly earnings reports. If they exceed that benchmark, they will then have to turn off their DSIC recovery until such time as their earnings fall below that. So we've looked at those numbers overnight. We're confident that it doesn't change our outlook for DISC collections during the planning horizon. I would put a caveat on it to say, we do have a settlement pending before the Pennsylvania Public Utilities Commission to increase the cap we have in Penn Power. So assuming that's approved, we expect to be able to continue to collect DSIC across all of our utilities throughout the planning period.

Okay, great, that's very helpful. You mentioned Penn Power. Is there a potential for Penn Power rate case sometime soon?

I don't think we're expecting a Penn Power rate case over the planning horizon and largely that's because we were able to reach a settlement with the other parties in Pennsylvania that's pending before the commission to allow us to collect DSIC revenue up to 7.5% of our base distribution rates in Penn Power, where for all the other utilities it's capped at 5%. So that really allowed us to cover that additional investment through the DSIC Rider and eliminated the need for a base rate case.

That's great. So Chuck, then is it fair to say that JCP&L might be the only rate case through 2023?

I'd say that's a fair way to look at where we're at today, yeah.

I would just – again, it's Eileen. I agree with Chuck. Put a caveat on it that we do have an obligation in 2023 to file an additional base rate case in the state of Maryland.

Right, good reminder. Okay, thank you so much.

Our next question comes from the line of Sophie Karp with KeyBanc Capital Markets. Please proceed with your question.

Hi, good morning.

Good morning.

I have a question on load growth. So you guys clearly mentioned that it's one of the factors that can help offset equity needs or impact you're planning in a way, and despite sort of a strong overall economy, it doesn't seem like we’ve seen a lot of that in Ohio or elsewhere, may be in new territories. Could you discuss that a little bit and maybe give us some sense of what you have seen on the ground and what can change that to actually see some positive load growth? Thank you.

Sophie, this is Steve Strah. And we're conservative in terms of the load growth that we do put into our plan. And right now I believe we will see more of what we've seen in 2019 and that is basically flat load growth to slightly declining load growth. But I also – just looking at 2019 for a moment, you know we were down 1.1% and that was slightly lower than our guidance, which was 0.6%. So when we estimate it, we're pretty good at estimating where we're going to land, we didn't miss it significantly. And in terms of sensitivities, the 1% decline that we saw in 2019 versus the guidance really impacts earnings only about 2%, and that's really driven by the residential sector. Our commercial and industrial loads are really – and rates are fixed or having demand rates, which are not as impactful. So right now we do see the manufacturing recession continuing on in 2020 before we start to see recovery. We're hopeful to start to see that recovery in mid-year or a little bit later. So right now I would just say look forward to flat load growth within our territory. We don't really see that changing significantly.

So, the only thing that I would add that I think in the back half of this planning period that we're talking about that could be significant is this shell cracker plant in Western Pennsylvania, and empirically as economists look at the world, it's difficult to factor that in. But I just drove over there for a meeting last week. It's due to come online by end of 2021, so it's a year and a half away. It won't be a lot of load itself, because they are going to self-generate with the methane, that's a waste product of the cracking process, but the industrial load that's going to pop-up, and is already popping up, you're starting to see cranes in the air on other sites, I think can have an opportunity to jump-start this economy in Eastern Ohio, Western Pennsylvania, Northern West Virginia, and we are now starting to see construction progress on the cracker plant in Ohio too. So the combination of both of those I think can be something that could be a good surprise and it's difficult to factor into the numbers.

I would also add Sophie lastly, you know we are encouraged by seeing the two consecutive years of residential load growth. Albeit modest, we look at that as being very positive for some of the reasons I mentioned earlier. So I don't want to be too much of a downer at all.

Thank you.

And look, I mean you're in northeastern Ohio. I mean we've got forward investing of over $1 billion in two plants in northeastern Ohio. GM had just announced the state-of-the-art battery manufacturing facility in Ohio. The former Lordstown plant is being repurposed into an electric vehicle, light-duty, medium-duty truck facility. So when those things all get done, the job market and the economy is going to benefit from all of that. So in the back end of this planning period, I'm optimistic that we can see some growth.

Got it, thank you.

Okay, I see no other questions in the queue. So thank you again for your support, really over the last five years since I've been in this job, and you know I think we intend to have another year in 2020 just like we've had in the last five years. Expect to be a fully regulated company here by the end of this month with FES behind us and then just move on from there. Thank you.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day!