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Text: We will also discuss certain non-GAAP financial measures, reconciliations between GAAP and non-GAAP financial measures.
Participants in today's call include our President and Chief Executive Officer, Steve Strah; Vice Chairperson and Executive Director, John Somerhalder 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.
Operating earnings were $0.59 per share, which is above the top end of our earnings guidance.
These strong operational results reflect a customer-focused investment strategy in our regulated distribution and transmission businesses, solid financial discipline and the continued shift in higher weather-adjusted demand from our residential customers.
We're pleased with our performance as well as the substantial progress we've made to transform FirstEnergy and position our company for the future.
We have taken critical steps to build a best-in-class compliance program while identifying and driving initiatives to deliver long-term value to all stakeholders.
Our leadership team is committed to modeling the behaviors and the humility necessary to restore trust with our stakeholders.
We look forward to continuing this work and achieving the milestones that will mark our progress.
I'll start our call today with an update on the DOJ and other investigations related to House Bill 6 and John Somerhalder will join us for a brief discussion on board activity and the progress of our compliance program.
Yesterday, we announced that we've entered into an agreement with the U.S. Attorney's Office for the Southern District of Ohio to resolve the DOJ investigation into FirstEnergy.
This deferred prosecution agreement was filed in federal court.
Under the three-year deferred prosecution agreement, we agreed to pay $230 million, which will be funded with cash on hand.
Half of these funds is designated for the U.S. Treasury and the other half is being directed to the benefit of utility customers by the Ohio Development Service Agency.
No portion of the filing will be recovered from customers.
We also agreed to the government's single charge of honest services wire fraud, which will be eventually dismissed, provided we abide by all the terms of the agreement.
In accordance with the agreement, we will provide regular reports to the government regarding our compliance program, as well as internal controls and policies and continued efforts to build on the comprehensive compliance initiatives we've rolled out this year.
The conduct that took place at our company was wrong and unacceptable.
Our Board, the management team and the entire FirstEnergy organization have done extensive work and are committed to make the necessary changes to move on from this.
Our progress on these efforts, along with the DPA, demonstrate that we are making meaningful headway in navigating through this period and we are positioned to move forward as a stronger integrity bound organization.
We will continue to cooperate fully with the ongoing investigations, audits and related matters as we work to resolve these issues and rebuild trust with our employees, customers, regulators and investors.
We are intently focused on fostering a strong culture of compliance and ethics and assuring that we have robust processes in place designed to ensure that nothing like this happens again.
In May, we held our first compliance town hall with employees to discuss what compliance, ethics and integrity mean at FirstEnergy and the importance of building a culture of trust where everyone is comfortable with speaking up when something doesn't feel right.
In the weeks following the town hall, our management team has responded to employee questions and concerns and we are committed to continuing this conversation and engagement.
Next week, we plan to hold another town hall meeting with employees where we will introduce our updated mission statement, reinforcing the role of uncompromising integrity as the cornerstone of FirstEnergy's identity and business strategies.
We will also refresh our core values to better reflect the importance of integrity together with safety, diversity, equity and inclusion, performance excellence and stewardship.
These values will be embedded in our practices and processes and become ingrained in the way we work.
Additionally, we updated our code of business conduct, which John Somerhalder will speak to in a moment.
We also continue to strengthen our leadership team with two more new hires, Michael Montaque joined us earlier this month as Vice President, Internal Audit and yesterday we announced that Soubhagya Parija has been named Vice President and Chief Risk Officer effective August 16.
These two experienced professionals represent another important step as we strengthen our key internal functions and I'm confident that they will help us develop best-in-class audit and enterprise risk programs.
Now, John Somerhalder will join us to provide an update on board matters and other facets of our compliance program.
Then I'll be back to discuss FE Forward and review some regulatory updates.
Our progress with the DOJ builds on the substantial steps we have taken to enhance our Board, strengthened our leadership team, ensured we have a best-in-class compliance program and significantly modify our approach to political engagement as we work to regain the trust of our stakeholders.
I'll start with a review of recent Board changes.
As you know, Jesse Lynn and Andrew Teno joined the Board from Icahn Capital in March, but they do not currently have voting rights pending regulatory approval.
I'm pleased to note that FERC approved our request for voting rights last week.
The process in Maryland continues as we have communicated FERC's recent action to the Commission.
Melvin Williams was elected to the Board at our Annual Meeting in May and last month we added two more independent directors, Lisa Winston Hicks and Paul Kaleta.
Jesse, Melvin, Lisa and Paul comprise our Special Litigation Committee.
This committee has full and binding authority to determine the company's action with respect to the pending shareholder derivative litigation.
I'll also note that with the formation of the Special Litigation Committee, the Board has dissolved Independent Review Committee.
As previously discussed, the company's internal investigation has now been transitioned from a proactive to a response mode and in light of the significant review, investigation and related actions accomplished by the independent review committee, the Board has also dissolved that committee.
But many proactive actions taken by the Board and management over the past year have improved our governance and put us in a strong position to remediate the material weakness associated with our tone at the top by the time we file our four quarter results.
Over the last several quarters, we've talked a lot about the work we're doing to elevate our ethics and compliance program and reinforce our values and expectations with all employees.
We continue to make timely progress in this area and our new, more centralized compliance organization is taking shape under Antonio Fernandez, who joined the company in April as our Chief Ethics and Compliance Officer.
Yesterday, we published our updated internal Code of Business Conduct, The Power of Integrity, which will be supported by ongoing education around behaviors and the importance of reporting ethical violations and we have continued to strengthen our policies, processes and internal controls including those around 501(c)(4)s, other corporate engagement and advocacy and business disbursements.
While the transformation of our culture and our steps to restore trust with all stakeholders will be long-term endeavors, this team has started building a stronger company built around a foundation of ethics, honesty and accountability.
The comprehensive assessment and recalibration of our ethics and compliance program has been running on a parallel path to FE Forward.
Our transformational effort to enhance value for all stakeholders by investing in modern and distinctive experiences that will improve the way we do business, we have improved our programmatic efforts to mature our ethics and compliance program into the FE Forward work.
In this way, we can leverage FE Forward's rigor to implement changes quickly and efficiently, embed ethics and compliance into our operational culture and ensure we sustain a comprehensive transformation well into the future.
FE forward has entered its third phase, which is a full-scale effort to execute our implementation plans.
The program is expected to deliver value and resilience including cumulative free cash flow improvements of approximately $800 million from 2021 through 2023 and an annual run rate capex efficiencies of about $300 million in 2024 and beyond.
At the same time, we expect the program to build on our strong operations and business fundamentals as we reinvest a portion of our efficiencies into strategic opportunities to better serve our customers and support a smarter and cleaner electric grid.
To ensure our organizational structure supports these improvement over the long term, we realigned our business units last month around five pillars: Finance and Strategy, Human Resources and Corporate Services, Legal, Operations and Customer Experience.
This new structure reflects a best-in-class model and supports operational excellence, clarity in decision making and accountability and less complexity.
As part of this new organizational structure, we've created a customer experience function that will truly understand our customers' evolving expectations, so we can develop solutions and drive benefits to customers.
We've also created a new position, Vice President transformation to shepherd the FE Forward initiatives across our company, while also developing customer focused emerging technology opportunities.
The development of executable plans, a best-in-class compliance program and critical organizational changes will position the company to move forward in a positive sustainable direction.
I'll just take a moment now and review recent regulatory matters starting in Ohio.
First, in July, the PUCO approved our filing to return approximately $27 million to our Ohio utility customers, representing all revenues that were previously collected through the decoupling mechanism plus interest.
Our Ohio utilities have filed supplemental testimony in the quadrennial review of our ESP IV.
We are committed to working with a broad range of parties in Ohio to resolve the range of issues that are still pending here.
We held our first full-scale collaborative meeting on March 31 and have since received further feedback from participants.
We are preparing for another collaborative meeting in the next few weeks.
We are also working through regulatory audits in Ohio, New Jersey, Pennsylvania and the FERC.
Finally, in April, the New Jersey BPU approved JCP&L's three year $203 million energy efficiency and conservation plan, which includes a return on certain costs, as well as the ability to recover lost distribution revenues.
As per our financial results, we're pleased with our strong performance in the first half of the year.
We are reaffirming our 2021 operating earnings guidance of $2.40 to $2.60 per share and we expect to be at the top half of that range.
We are also introducing third quarter guidance of $0.70 to $0.80 per share.
We remain focused on executing our plans, maintaining our costs and building on this positive momentum.
We are making substantial progress to transform FirstEnergy live up to our values and deliver long-term value to all of our stakeholders.
Yesterday, we announced GAAP earnings of $0.11 per share for the second quarter of 2021 and operating earnings of $0.59 per share.
As Steve mentioned, this exceeded the top end of our guidance range.
Special items in the second quarter of 2021 include investigation and other related costs, which include the impact from the deferred prosecution agreement, as well as regulatory charges and state tax legislative changes.
In our distribution business, 2021 second quarter results as compared to 2020 reflect growth from our capital investment programs, rate increases and lower expenses, primarily related to the absence of pandemic related expenses we incurred in the second quarter of last year, partially offset by the absence of Ohio decoupling and lost distribution revenues in the second quarter of 2020, which we stopped collecting earlier this year.
Total distribution deliveries increased on both an actual and weather-adjusted basis compared to the second quarter of 2020 when many of the pandemic related restrictions were in full effect.
However, the mix of customer usage resulted in a flat year-over-year earnings impact.
Second quarter 2021 weather-adjusted residential sales were 6% lower than the same period last year when many of our customers were under strict stay at home orders.
However, as we look at trends, weather-adjusted residential usage over the past few quarters has been on average about 4% higher than pre-pandemic levels and in fact, the second quarter of this year was close to 8% higher than weather-adjusted usage we saw in the second quarter of 2019.
We think more permanent work from home initiatives could impact our longer-term load forecast and we will be watching closely to see if the structural shift in our residential customer class continues.
Weather-adjusted deliveries to commercial customers increased 8% and industrial load increased 11% as compared to the second quarter of 2020.
Despite the increase in commercial activity this spring, weather-adjusted demand in this customer class continues to lag pre-pandemic levels by an average of about 6%.
Looking at the industrial class, we are encouraged by the steady recovery in demand over the past year.
In fact, this quarter, industrial load was only slightly down compared to the second quarter of 2019.
We continue to see higher load from the shale gas industry, but that was offset by lower load in other industrial sectors such as steel, auto and mining, which have not fully recovered to pre-pandemic levels.
In our Regulated Transmission segment, higher net financing costs in the second quarter of 2021, primarily related to our revolving credit facility borrowings were more than offset by the impact of higher transmission investment at MAIT and ATSI related to our Energizing the Future program.
Our transmission investments drove year-over-year rate base growth of 7%.
And in our Corporate segment results reflect the absence of discrete tax benefits recognized in the second quarter of 2020, as well as higher interest expense.
For the first half of 2021, operating earnings were $1.28 per share compared to $1.23 per share in the first half of 2020.
This increase was the result of continued investments in our transmission and distribution systems, weather-related sales and lower expenses and consistent with our second quarter results, the positive drivers for the first half of this year more than offset the absence of $0.13 of decoupling and lost distribution revenues that were recognized in the first half of 2020 that are no longer in place this year.
Additionally, our continued focus on financial discipline together with strong financial results helped drive a $196 million increase in adjusted cash from operations versus our internal plan and a $264 million increase above the first six months of last year, building on the improvements we noted on our first quarter earnings call.
As per capital markets activity, we continue making good progress on this year's debt financing plan with five of our six debt transactions complete, all with pricing similar to investment grade companies.
In May, we issued a $150 million in senior notes at Toledo Edison and MAIT with pricing at 2.65% and 2.55% respectively.
And in June, we issued $500 million in senior notes at JCP&L that priced at 2.75%.
In addition, we made progress on our commitment to reduce short-term debt during the second quarter by repaying $950 million under our revolving credit facilities bringing our borrowings down to $500 million as of June 30.
And earlier this week, we repaid the remaining $500 million under these facilities.
While we did obtain a waiver for our credit facilities related to the DPA, this repayment was voluntary and not required by the bank group.
We plan to operate on a normal course going forward and we utilize the revolving credit facilities on an as needed basis as we have done historically.
As you know, we have two revolving credit facilities, one for FE Corp, which is shared with our utility companies and one for FET both expiring in December of 2022.
Over the next few months, we plan to work with our bank group to evaluate and refinance these bank facilities with the goal of completing this initiative before the end of the year.
And finally, we continue to consider alternatives to our equity needs.
We continue to think through options that include a minority sale of distribution and/or transmission assets, which would raise substantial proceeds and eliminate all of our expected non-SIP equity needs, ensure the execution of our balance sheet improvement plans and provide funding for strategic capex in customer-focused emerging technologies that support the transition to a cleaner electric grid.
Based on our current timeframe, we expect to provide you with an update in the fourth quarter.

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reaffirms fy non-gaap operating earnings per share view $2.40 to $2.60.
q2 gaap earnings per share $0.11.
q2 revenue $2.6 billion versus refinitiv ibes estimate of $2.65 billion.
for q3 of 2021, providing a gaap and operating (non-gaap) forecast range of $380 million to $435 million, or $0.70 to $0.80 per share.
operating (non-gaap) earnings were $0.59 for q2 of 2021.

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