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Text: We will also discuss certain non-GAAP financial measures.
Participants in today's call include our President and Chief Executive Officer, Steve Strah; Senior Vice President and Chief Financial Officer, Jon Taylor; and our Vice Chairperson and Executive Director, John Somerhalder.
We will also have several other executives available to join us for the Q&A session.
Yesterday, we reported first quarter 2021 GAAP earnings of $0.62 per share and operating earnings of $0.69 per share, which is in the upper end of our guidance range.
As Jon will discuss, our results reflect the continued successful implementation of our investment strategies, higher weather-adjusted load in our residential class and strong financial discipline in managing our operating expenses.
Last month, I was honored to be named FirstEnergy's CEO and appointed to the Board of Directors.
I greatly appreciate the trust and confidence the Board has placed in me, since I was named President last May and Acting CEO in October.
I have great pride in FirstEnergy and the work our employees do to serve our customers and communities.
It's my privilege to continue leading the company as we navigate our current challenges and position our business for long-term stability and success.
As we work to move FirstEnergy forward, my priorities are the continued safety of our employees and customers.
Ensuring that ethics, accountability and integrity are deeply ingrained in our culture and supported by a strong corporate compliance program.
Executing FE forward, our transformational effort to capitalize on our potential, deliver long-term results and maximize near-term financial flexibility and continuing our investments in infrastructure growth opportunities from electrification, grid modernization and renewable integration to benefit our customers.
During today's call, I'll provide an update on the Department of Justice investigation, regulatory matters and our FE Forward initiative and other business developments.
John Somerhalder will join us for an update on the Board and management's work toward instilling a culture of compliance built upon the highest standards of ethics and integrity.
As we discussed on our fourth quarter call, we are committed to taking decisive actions to rebuild our reputation and focus on the future and continuing to cooperate with the ongoing government investigations.
We have begun discussions with the DOJ regarding the resolution of this matter, including the possibility FirstEnergy entering into a deferred prosecution agreement.
We can't currently predict the timing, outcome or the impact of the possible resolution with the DOJ.
Our goal is to take a holistic and transparent approach with a range of stakeholders across the spectrum of matters under review.
This approach is consistent with the changes we're making in our political and legislative engagement and advocacy.
For example, we are stopping all contributions to 501(c)(4)s.
We've paused all other political disbursements, including from our political action committee.
And we have limited our participation in the political process.
We have also suspended and/or terminated various political consulting relationships.
In addition, we'll be expanding our disclosures around political spending in order to provide increased transparency.
For example, we have committed to post updates on our website, on our corporate political activity, relationship with trade associations and our corporate political activity policy, which is under revision.
A comprehensive and open approach is also the cornerstone in our regulatory activity.
In Ohio, we continue taking proactive steps to reduce the regulatory uncertainty, affecting our utilities in the state.
This includes our decision in late March to credit our Ohio utility customers approximately $27 million.
This comprises the revenues that were collected through the decoupling mechanism authorized under Ohio law plus interest, the partial settlement with the Ohio Attorney General to stop collections of decoupling revenues and our decision not to seek recovery of lost distribution revenues from our Ohio customers.
Together, these actions fully address the requirements approved in Ohio House Bill 128 as well as the related rate impact of House Bill 6 on our customers.
These are important steps to put this matter behind us.
In other Ohio regulatory matters, we proactively updated our testimony in the ESP quadrennial review case to provide perspective SEET values on an individual company basis.
We are engaged in settlement discussions with interested parties on this matter as well as the 2017, 2018 and 2019 SEET cases that were consolidated into this proceeding.
During our last call, we mentioned that we were proactively engaging with our regulators to refund customers for certain vendor payments.
Those conversations are under way in each effective jurisdiction.
In Ohio at the PUCO's request, the scope of our annual audit of Rider DCR has been expanded to include a review of these payments.
Outside of Ohio, our state regulatory activity is concentrated on customer-focused initiatives that will support the transition to a cleaner climate.
For example, on March 1, JCP&L, filed a petition with the New Jersey Board of Public Utilities seeking approval for its proposed EV driven program.
If approved, the four-year $50 million program would offer incentives and rate structures to support the development of EV charging infrastructure throughout our New Jersey service territory, in an effort to accelerate the adoption of electric vehicles and provide benefits to our residential, commercial and industrial customers.
And in late March the Pennsylvania PUC approved our five-year $390 million energy efficiency and conservation plan, which supports the PUC's consumption reduction targets.
In March, we closed the transaction to sell JCP&L's 50% interest in the Yards Creek pump-storage hydro plant and received proceeds of $155 million.
And we also announced plans to sell Penelec's Waverly New York distribution assets, which serves about 3,800 customers to a local co-op.
The deal, which is subject to regulatory approval will simplify Penelec's business by solely focusing on Pennsylvania customers.
During our fourth quarter call, we introduced you to FE Forward, our companywide effort to transform FirstEnergy into a more resilient, effective industry leader delivering superior customer value and shareholder returns.
We expect the FE Forward initiatives to provide a more modern experience for our customers with efficiencies in operating and capital expenditures that can be strategically reinvested into our business, supporting our growth and investments in a smarter and cleaner electric grid, while also maintaining affordable electric bills.
During the first phase of the project, we evaluated our processes, business practices and cultural norms to understand where we can improve.
While our safety and reliability performance is strong, we found opportunities in many areas to enhance and automate processes, take a more strategic focus on operating expenditures and modernize experiences for our customers and employees.
We've identified more than 300 opportunities and now we are diving deeper into these ideas, developing detailed executable plans as we prepare for implementation beginning later this quarter.
Examples of this work include, improving the planning and scheduling through integration of systems to allow our employees to deliver their best to our customers, leveraging advanced technologies such as drones and satellite imagery to improve our vegetation management programs, using predictive analytics and web-based tools to provide our customers with more self service options and improve their experience and leverage purchasing power to optimize payment terms.
As part of these efforts, we intend to evaluate the appropriate cadence to initiate rate cases on a state-by-state basis to best support our customer focused strategic priorities.
We will also remain focused on emerging technologies, smart grid, electric vehicle infrastructure and our customers' evolving energy needs as we think through how to reduce our carbon footprint.
We're off to a great start this year, and yesterday we reaffirmed our 2021 operating earnings guidance of $2.40 to $2.60 per share.
Our leadership team is committed to upholding our core values and behaviors and executing on our proven strategies as we put our customers at the center of everything we do.
We will take the appropriate steps to deliver on our promise to make FirstEnergy a better company, one that is respected by our customers, the investment community, regulators and our employees.
It's a privilege and a pleasure to join you today.
I'd like to start by sharing my impressions of FirstEnergy after almost two months in this role.
This is a company with a firm foundation, including a commitment to improve in the area of governance and compliance, our commitment to customers by embracing innovation and technology to help ensure the strength, resilience and reliability of its transmission and distribution businesses, a deep seeded and strong safety culture and a strong potential to deliver significant value to investors through customer focused growth.
Since joining the team, I've been supporting senior leadership in advancing the company's priorities, strengthening our governance and compliance functions and enhancing our relationships with external stakeholders, including regulators and the financial community.
Steve spoke about our business priorities.
So, I will focus my remarks today on our compliance work including remedial actions.
First, I'd like to update you on our internal investigation which has rebuild no new material issues since our last earnings call.
The focus of the internal investigation has transitioned from a proactive investigation to continued cooperation with the ongoing government investigations.
Management and the Board with the assistance of the compliance subcommittee of the Audit Committee, have been working together to build a best-in-class compliance program.
Through these efforts, we have identified improvement opportunities in five broad categories, including governance, risk management, training and communications, concerns management and third-party management.
As part of these efforts FirstEnergy is embracing a commitment to enhancing its compliance culture to be best-in-class.
Some of the actions completed to date include hiring, our Senior Vice President and Chief Legal Officer, Hyun Park in January; Antonio Fernandez, who joined as Vice President and Chief Ethics and Compliance Officer last week; and myself.
On the Board side, Jesse Lynn and Andrew Teno, joined us from Icahn Capital in March.
And the Board has nominated a new Independent Member, Melvin Williams for election at the Annual Shareholders Meeting when Sandy Pianalto's term ends next month.
I believe the insights and experience of these new leaders are helping to round out a very committed and confident Board and management team.
In March, the Board affirmed our confidence in Steve by naming him CEO.
Steve has consistently demonstrated the integrity, leadership skills, strategic acumen and deep knowledge of our businesses needed to position FirstEnergy for long-term success and stability.
These changes along with the Board's reinforcement of the executive team's commitment to setting the appropriate tone at the top or support a culture of compliance going forward.
For instance, we recently held an event where the Chairman and the Chair of the Compliance subcommittee addressed the company's top 140 leaders, regarding the expectations to act with integrity, in everything we do.
Our legal department recently completed training on up the ladder reporting and we have enhanced our on-boarding process for new employees and for third-parties on expectations around our code of business conduct.
Over the course of the next few months, there will be many more steps the company will take to enhance our compliance program such as, continuing to build the new more centralized compliance organization under Antonio's leadership; addressing our processes, policies and controls, which include additional oversight for political contributions; continuing to emphasize our values and expectations in ongoing communications with our employees, incorporating compliance into our goals and performance metrics and holding all employees regardless of title to the same standards; enhancing the channels for incident reporting and developing thorough and objective processes to investigate and address allegations of misconduct; and insuring increased communications with and training of employees with respect to our commitment to ethical standards and integrity of our business procedures; compliance requirements; our code of business conduct; and other company policies; and understanding and utilizing the process for reporting suspected violations of law or code of business conduct.
We have also enhanced our internal controls around disbursements to require additional approvals, targeted reviews of any suspicious payments and a reassessment of approval levels across the entire company.
Additionally, in the area of disbursements, we will update and clarify policies and procedures, conduct training and institute a regular audit program that reviews payments and services performed.
A detailed list of the corrective actions we are taking can be found on Pages 8 and 9 of our first quarter FactBook.
Over the next several months, we expect to make significant progress in the areas of compliance led by Antonio's organization, where it will continue to be overseen by the Board and the newly established management steering committee for Ethics and Compliance.
Through these efforts, we expect the material weakness associated with the tone at the top to be remediated by the time we file our fourth quarter earnings.
Our leaders are continuing to elevate the importance of compliance and working to regain the trust of employees and our stakeholders by modeling appropriate behavior and consistently communicating that compliance and ethics are core values, just like safety.
We are committed to ensuring that employees understand what is expected of them and are comfortable reporting ethical violations without fear precautions.
By continually emphasizing the importance of compliance to our strategies and future as well as demonstrating that we are setting the right tone at the top, we strive to bolster confidence among our employees that the management team and the Board are taking the proper decisive actions to move the company forward.
I believe we have learned a lot from recent challenges and are taking the right actions to emerge as a better, stronger company with a bright future.
Now I'll turn the floor over to Jon Taylor for a review of first quarter results and the financial update.
We have provided new disclosures in three main areas within our Investor FactBook.
Our steps to support a cleaner, smarter grid and the movement to more green and renewable resources, additional disclosures on our balance sheet, including our funds from operations target and the steps we're taking to achieve our goals and third, enhanced ESG disclosures.
Also note that we continue to provide more robust disclosures on ROEs including more granular sensitivities.
Yesterday we announced GAAP earnings of $0.62 per share for the first quarter of 2021 and operating earnings of $0.69 per share, which was at the upper end of our guidance range.
GAAP results for 2021 include two special items, regulatory charges related to customer refunds associated with previously collected Ohio decoupling revenues and expenses associated with the investigation.
In our distribution business our results for the first quarter of this year as compared to 2020 reflect higher residential usage on both in actual and weather-adjusted basis as well as growth from incremental riders and rate increases, including DCR and grid modernization in Ohio, the distribution system improvement charge in Pennsylvania and the implementation of our base rate case settlement in New Jersey.
These drivers were partially offset by $0.10 per share related to the absence of Ohio decoupling revenues and our decision to forgo the collection of lost distribution revenues from our residential and commercial customers.
Our total distribution deliveries for the first quarter of 2021 decreased 2% on a weather-adjusted basis as compared to the last year, reflecting an increase in residential sales of 2% as customers continue to spend more time at home in the first quarter of 2021, a decline of 7% in commercial sales and in our industrial class first quarter low decreased 3%.
It's worth noting that total distribution deliveries through the first quarter are consistent with our internal load forecast, with residential demand 2% higher versus our forecast, while industrial load is down 2%.
In our regulated transmission business earnings decreased as a result of higher net financing costs, which included an adjustment to previously capitalized interest, partially offset by the impact of rate base growth at our ATSI and MAIT subsidiaries.
Finally, in our corporate segment, results reflect lower operating expenses, offset by the absence of a first quarter 2020 pension OPEB credit, related to energy harbors emergence from bankruptcy as well as higher interest expense.
We are off to a solid start for the year and are reaffirming our operating earnings guidance of $2.40 to $2.60 per share for 2021.
We've also introduced second quarter guidance of $0.48 to $0.58 per share.
In addition, our strong focus on cash helped drive a $125 million increase in adjusted cash from operations and a $185 million increase in free cash flow versus our internal plan for the first quarter.
As to a couple of other financial updates, our 2021 debt financing plan remains on track.
In March FirstEnergy transmission issued $500 million in senior notes and a strong well supported bond offering that showcase the strength of our transmission business.
The deal was oversubscribed and on par with an investment grade offering.
We used the proceeds to repay $500 million in short-term borrowings under the FET revolving credit facility.
In addition, we repaid $250 million at the FirstEnergy Holding Company.
We also successfully issued $200 million in first mortgage bonds at MonPower in April, that was also very well supported.
This supports our earlier commitment to reduce short-term borrowings as well as our goal to improve our credit metrics at FirstEnergy, return to investment grade as quickly as possible and maintain the strong credit ratings at our utilities.
We continue to provide the rating agencies with regular updates on our business and we are working with them to develop a clear outline of what is needed to return FirstEnergy to investment grade credit ratings.
Key milestones include governance and compliance changes at our company, resolution of the DOJ investigation and solid credit metrics.
As to more longer term financing needs through the execution of FE Forward, we have reduced our debt financing plan by approximately $1 billion through 2023, mainly at the FirstEnergy and FirstEnergy Transmission holding companies.
Additionally, as we have previously mentioned, equity is an important part of our overall financing plan, with plans to raise up to $1.2 billion of equity over 2022 and 2023.
As we said previously, we'll flex these plans as needed and we are also exploring various alternatives to raise equity capital in a manner that could be more value enhancing to all stakeholders.
These actions combined with new rates at JCP&L and our 60% plus formula rate capital investment program will generate $150 million to $200 million of incremental cash flow each year, while maintaining relatively flat adjusted debt levels through 2023, all of which will support our targeted 12% to 13% FFO to debt range.
Turning to our pension.
Our funding status was 81% at March 31, up from 78% at the end of last year, resulting in a $500 million reduction in our unfunded pension obligation, which improves our adjusted debt position with the rating agencies.
The extended funding timeframe permitted under the American Rescue plan, together with the modification of interest rate stabilization rules means that we do not expect any funding requirements for the foreseeable future, assuming our plan achieves a 7.5% expected return on assets.
Although, we plan to make contributions into the pension next year, this legislation provides us with additional discretion and flexibility to make voluntary contributions as we assess our capital allocation plans.
As Steve mentioned discussions have begun with the Department of Justice.
While no contingency has been reflected in our consolidated financial statements, we believe that it is probable we will incur a loss in connection with the resolution of this investigation.
However, we cannot yet reasonably estimate the amount.
Finally last month President Biden introduced the American Jobs Plan, which includes a corporate tax increase and proposed minimum tax as well as potential opportunities related to proposed infusion into the electric vehicle infrastructure and the energy grid.
Clearly, it's very early in the process, but the corporate tax provision could be slightly cash positive for us if implemented in its current form.
Our solid first quarter results and expectations for the year reflect our strong operating fundamentals and the continued success of our strategies to modernize and enhance our distribution and transmission systems.
As we move our company forward, we are laser focused on unlocking opportunities and increasing value for our shareholders, customers and employees.
Now, let's open the call to your Q&A.

user
sees fy non-gaap operating earnings per share $2.40 to $2.60.
q1 gaap earnings per share $0.62.
affirming its full-year 2021 operating (non-gaap) earnings guidance of $2.40 to $2.60 per share.
for q2 of 2021, gaap and operating (non-gaap) earnings forecast range of $260 million to $315 million, or $0.48 to $0.58 per share.
operating (non-gaap) earnings for q1 of 2021 were $0.69 per share.

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