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Text: We will also discuss certain non-GAAP financial measures.
Participants in today's call include our Executive Director, Chris Pappas; Acting Chief Executive Officer, 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.
For those of you who do not know Chris, he has been an Independent Member of the FirstEnergy Board since 2011 and he retired in 2019 as President and Chief Executive Officer of Trinseo SA.
I appreciate the opportunity to participate in today's call.
I'm going to start out by discussing the leadership transition the company announced last week, my role with the company and the Board's governance efforts.
First, I will note that the DOJ investigation prompted a number of shareholder and customer lawsuits, and we are also responding to a subpoena we received from the SEC on September 2nd, related to the investigation in the FirstEnergy by the SEC division of enforcement.
We are cooperating with the DOJ and the SEC.
During the course of our internal review related to the ongoing government investigation regarding House Bill 6, the Independent Review Committee of the Board determined that three executives violated certain FirstEnergy Policies and its Code of Conduct.
When we determine that employee conduct is inconsistent with our policy and values, no matter how senior the individual, we have a duty to take action, and that is what we have done here.
As a result, FirstEnergy announced on Thursday that CEO Chuck Jones, along with Dennis Chack, Senior Vice President of Product Development, Marketing and Branding; and Mike Dowling, Senior Vice President of External Affairs, were all terminated effective immediately.
Concurrently, Steve Strah, who many of you know from his roles as FirstEnergy's President and previously CFO, was appointed acting CEO.
Steve has the experience, credibility and the support of the Board in this role.
Steve is a highly respected executive with deep knowledge of FirstEnergy's business and significant operational experience.
He became President in May 2020 as part of the company's ordinary course succession planning process.
In his various leadership roles at the company, including his recent tenure as CFO and President, Steve has supported the execution of FirstEnergy's long-term customer-focused growth strategy and demonstrated his commitment to delivering value to all stakeholders, including employees, customers, communities and shareholders.
I look forward to working closely with him in my new role as Executive Director.
In this role, I remain an Independent Member of the Board and will also work closely with Don Misheff, our non-Executive Chairman, to assist management team's execution of strategic initiatives, to engage with the company's external stakeholders, including the investment community as appropriate, and to support the development of enhanced controls and governance policies and procedures.
The Board is already conducting a full review of its governance and oversight processes to look for areas of improvement going forward.
This is a serious matter for our Board and for FirstEnergy Management.
In order to address this in a timely and effective way, the Board has formed a new subcommittee of our Audit Committee, to quickly assess and implement potential changes as appropriate in the company's compliance program.
This effort will be led by independent Board member, Leslie Turner.
Leslie retired as Senior Vice President, General Counsel and Corporate Secretary of The Hershey Company.
She joined our Board in 2018 and is a member of the Audit and Compensation Committees.
This new subcommittee will work with management, internal audit and also engage outside expertise for help and best practices.
As I previously mentioned, we have and will continue to cooperate with the DOJ and SEC investigations.
We have also reached out to company's key stakeholders, including the ratings agencies, banks, regulators, legislators and union leadership.
We believe the actions the Board has taken, represent an additional step toward addressing these matters and enable's FirstEnergy's management to continue to focus on running the business day to day.
FirstEnergy embarked on a strategy several years ago to become a fully regulated company and grow through the substantial opportunities available in both the distribution and transmission businesses.
That strategy will continue.
It is working and the foundational drivers are intact.
The FirstEnergy organization at large has been delivering excellent results over the last few years and that continues with the strong performance year-to-date and the company's expectations for the full year.
As we look ahead, the Board has full confidence in Steve and the rest of the team's ability to ensure a seamless transition and to continue to execute the company's strategy.
While I would have preferred to have assumed my new role under different circumstances, I agree with Chris that the actions taken by our Board of Directors last week, were absolutely necessary and are an additional step toward addressing this matter.
The management team is committed to working with the Board to assess and implement potential changes, as appropriate, with the company's compliance program.
We take this as a serious and important matter and we will begin to address this immediately.
In my 36 years with the company, we have faced challenges and changes, and we have always emerged stronger and even more dedicated to our mission.
Our management team remains focused on keeping each other safe, providing reliable service to our customers and executing our growth initiatives.
I am confident that we will continue to carry out this plan, finish the year strong and enter 2021 with momentum.
I look forward to working with our team to achieve this.
With that, let me transition to a brief update on our operations and recent regulatory activity, then Jon will review our results and other financial matters.
While the pandemic continues to impact our work protocols, our customers' lives, and the economy, I am extremely proud of the hard work and resiliencies our employees have demonstrated throughout this crisis.
We remain on pace to complete more than $3 billion in customer-focused investments across our system this year and our business model and rate structure continue to provide stability.
Those results primarily reflect the successful implementation of our regulated growth strategies and favorable weather, together with a continuation of the pandemic-driven load trends we noted on our second quarter call.
As Jon will discuss in more detail, the earnings impact of higher weather-adjusted sales from residential customers more than offset the lower usage in our commercial and industrial sectors.
Based on our strong performance year-to-date and the expectations for the next couple of months, we are affirming our guidance range of $2.40 to $2.60 per share, and currently expect to be near the top end of that range.
If decoupling is part of a House Bill 6 repeal, we would be closer to the $2.50 per share midpoint.
We have updated our funds from operations and free cash flow forecast for 2020, to reflect the impacts of higher storm costs of approximately $145 million and higher costs associated with the pandemic, including uncollectibles of approximately $120 million, most of which are deferred for future recovery.
Although the events of this past week and the government investigations create additional uncertainty, we are affirming our expected CAGR of 6% to 8% through 2021 and 5% to 7% extending through 2023, along with our plan to issue up to $600 million in equity annually in 2022 and 2023.
With that said, we are mindful that the current situation may present additional challenges to meet this objective.
Jon will address some tactics we are taking to address uncertainty created by the investigation.
Now, let's turn to regulatory matters.
In New Jersey, JCP&L filed an AMI implementation plan with the Board of Public Utilities in late August.
If approved, we would begin installing 1.15 million smart meters and related infrastructure across our New Jersey service territory, over a three-year period beginning in 2023.
Also, at JCP&L, last week, we were very pleased that the BPU approved our settlement in the distribution base rate case, as well as the sale of JCP&L's interest in the Yards Creek pumped storage hydro generation facility.
The settlement provides recovery for increasing costs associated with providing safe and reliable electric service for our JCP&L customers, along with the recovery of storm costs incurred over the past few years.
It includes a $94 million annual increase in distribution revenues, based on an ROE of 9.6%.
The settlement also includes an agreement to delay the implementation of the rate increase until November 1st, 2021, to assist our customers during the pandemic.
Prior to then, the rate increase will be offset through amortization of regulatory liabilities totaling approximately $86 million, beginning January 1st.
The parties also agreed that the net gains from the sale of JCP&L's interest in Yards Creek, estimated at $110 million, will be used to reduce the regulatory asset for previously deferred storm costs.
We expect to close the Yards Creek transaction within the next few months.
This includes transmission assets in the West Penn Power territory in Pennsylvania, the Mon Power territory in West Virginia and the Potomac Edison territory in West Virginia, Maryland and Virginia.
We are requesting an effective date of January 1, 2021.
In addition, we created a new stand-alone transmission company, Keystone Appalachian Transmission Company or KATCo, to accommodate the new construction in this footprint.
In closing, while I find it disappointing that we have arrived at this point, I have great confidence not only in the management team but in the full support of the Board of Directors; and together, we're committed to lead this company out of it.
I'd like to reiterate that our regulated growth strategy is strong.
It is working and it is moving forward, and I am committed to working with management and the Board to address changes to our compliance program.
As always, all reconciliations and other detailed information about the quarter can be found in the Strategic and Financial Highlights document on our website.
While we traditionally file the 10-Q in connection with our call, we don't expect to file it this week, as we continue our review and closing procedures to ensure we provide appropriate disclosure.
Also, as we noted in Friday's 8-K, the violations of certain company Policy and Code of Conduct by the terminated executives, has caused us to reevaluate our controls framework and that could lead to identifying one or more material weaknesses.
However, based on our review of these issues, we do not expect any impact to prior period financial results.
As Steve noted, operating earnings were a $0.01 above the top end of our earnings guidance range, largely reflecting the ongoing success of our regulated growth strategy, as well as benefits from weather.
In the distribution business, revenues increased compared to the third quarter of 2019, as a result of higher weather-adjusted residential usage and incremental rider revenue driven by our capital investment programs in Ohio and Pennsylvania.
Total distribution deliveries decreased compared to the third quarter of 2019, on both in actual and weather-adjusted basis.
Cooling degree days were approximately 21% above normal and relatively flat to the third quarter of 2019.
Total residential sales increased 5.3% on a weather-adjusted basis compared to the same period last year, as many people continued to work-from-home and spend more time at home due to the pandemic.
In the commercial customer class, sales decreased 5.5% on a weather-adjusted basis compared to the third quarter of 2019.
And in our industrial class, third quarter load decreased 6.3% compared to the same period last year.
Consistent with the trends we've seen for the past 12 months, the only sector showing growth in our footprint was shale gas.
As we discussed last quarter, the increased residential volumes more than offset the decrease in commercial industrial load from a revenue perspective.
In our transmission business, earnings were flat compared to the third quarter of 2019, as the earnings growth associated with our energizing the future transmission initiative were offset by higher net financing costs and the absence of a tax benefit recognized in the third quarter of 2019.
And in our corporate segment, our results primarily reflect higher tax benefits compared to the third quarter of 2019.
In the fourth quarter, we will make our annual pension and OPEB mark-to-market adjustment.
Based on the asset returns through September 30th and a discount rate ranging from 2.7% to 3%, we estimate that adjustment to be between an after-tax loss of $330 million to a gain of $40 million.
As a reminder, this is a non-cash item.
Year-to-date, our return on assets is 9.2% versus our assumption of 7.5% and our funded status remains at 77%.
As Chris mentioned, we proactively reached out to the three rating agencies last week to discuss within the leadership transition and our path forward.
While we believe the fundamentals of our business remain strong, we understand there are certain management and governance factors that the agencies consider in the risk assessment, which ultimately impact the credit ratings.
The rating agencies have taken numerous actions and we have provided all the details in the Investor Factbook.
FE Corp remains at investment grade with both Fitch and Moody's.
At S&P, while we are not investment grade at FE Corp or FirstEnergy Transmission, all other subsidiaries remain investment grade at their issue-level ratings.
We will continue to maintain our open dialog with each of the agencies and remain in close contact with them as we chart our path forward.
Finally, I'll take a few minutes to review other financial considerations and tactical changes we are making to address the uncertainty created by the investigations.
First, from a liquidity perspective, I'll remind you that we continue to have access to $3.5 billion of credit facilities committed through December 2022.
In addition, we expect our holding company debt to remain around 35% of total adjusted debt and we have no plans to increase debt at the FirstEnergy HoldCo.
To further refine expectations for 2021, I want to make a few comments about the dividend and reaffirm our dividend policy.
Two years ago, at EEI, we announced a targeted payout ratio of 55% to 65% of our operating earnings.
In alignment with that policy, our Board raised a quarterly payout by $0.02 per share for dividends paid in 2019 and then by $0.01 per share for those paid in 2020.
Given our current yield of approximately 5%, we expect to hold our quarterly dividend at $0.39 per share or $1.56 per share on an annualized basis for next year.
This would represent a 59% payout ratio to our CAGR midpoint for 2021.
The Board will continue to review the dividend on a quarterly basis.
From a tactical perspective, our 2021 base O&M is flat to 2020 levels, and we assume begin developing plans for reductions to operating expenses, if necessary.
With respect to our overall capital programs, for 2021, our capex programs will be at the $3 billion level and we will consider reductions if necessary.
Equity continues to be a part of our overall financing plan.
As Steve said, we are reaffirming our plan to issue up to $600 million in equity annually, in 2022 and 2023, and we will take the necessary actions financially to weather this uncertainty and put the company in the best position possible.
We believe these steps are prudent to provide flexibility as we face uncertainty in the near term.
I know you have many questions.
We are not going to provide more information at this time.
The Board and management view this as a serious and important matter, and our newly appointed subcommittee of the Audit Committee, led by Leslie Turner, as well as management and Internal Audit, will address this immediately.
FirstEnergy strategy is working and delivering results as shown in our third quarter 2020 results and our outlook going forward, but matters related to the investigation will add uncertainties to the future financial results of the company.
The tactical financial changes that Jon described earlier, are prudent to provide flexibility as we face uncertainty in the near term.
And now, we'll open to questions-and-answers.

user
sees fy 2020 non-gaap operating earnings per share $2.40 to $2.60.
remains on track to achieve 6% to 8% compound annual operating earnings growth from 2018 to 2021.

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