2017 Address to Shareholders
2017 FirstEnergy Corp. Annual Meeting of Shareholders
Remarks by President and CEO Chuck Jones
Thank you, George. Good morning, and thanks for joining us today.
Your company made significant progress in 2016 and the first part of this year in transitioning to a more fully regulated, customer-focused business – and away from commodity-exposed generation.
Toward that end, we took steps to sell or transfer certain competitive generating assets. In March of this year, our Mon Power and Potomac Edison utilities filed a plan seeking regulatory approval to acquire Pleasants Power Station – currently owned and operated by our competitive subsidiary, Allegheny Energy Supply – as the lowest-cost source to meet a capacity shortfall in their West Virginia service areas. Also, Allegheny Energy Supply entered into an agreement to sell four competitive natural gas power plants in Pennsylvania and the competitive portion of a Virginia hydroelectric power station. The transaction remains subject to regulatory approvals and consents from third parties.
In addition, our FirstEnergy Generation Company made progress in resolving two coal transportation contract disputes. Although an arbitration panel issued a negative ruling in one of the disputes, we engaged in settlement discussions with CSX Transportation and BNSF Railway Company. As a result of those discussions, the parties entered into a settlement agreement to resolve all claims in return for a payment of $109 million. We also are engaged in settlement discussions regarding the second coal transportation contract with BNSF and Norfolk Southern.
In the fourth quarter of 2016, we recorded a non-cash, pre-tax impairment charge of $9.2 billion to reduce the carrying value of certain assets to their estimated fair value. These assets include generating plants, nuclear fuel and related materials and supplies. We took this major step because the carrying value of these long-standing assets is simply not recoverable, given our goal to exit competitive markets by mid-2018 and the cash flows we anticipate over this period.
We also recognize that moving away from the competitive generation business will require that our company look different in the future than it does today. Toward that end, a team of our employees is currently evaluating our shared services – such as legal, IT, finance and human resources – to determine the basic structures and skills we will need to support a more fully regulated company.
In today’s energy business, we cannot succeed with just a good defense. We also need a strong offense, and that involves taking on the tough issues that have created challenges for our baseload power plants. These include federal policies that favor less-reliable sources of power, such as natural gas and intermittent renewables. And those policies, in turn, undermine the value of our baseload assets that bring significant fuel security and other benefits to our customers, communities and the environment.
From an operational standpoint, our baseload plants play a critical role in ensuring our customers have the clean power they need, when they need it. For example, our Davis-Besse, Perry and Beaver Valley nuclear plants have the ability to operate 24/7 – generating enough electricity to power more than 4 million homes, around the clock. In fact, nuclear facilities produce more than 90 percent of the carbon-free power in Ohio and Pennsylvania.
FirstEnergy’s nuclear plants directly employ approximately 2,300 people – and thousands of additional full-time jobs are tied to these three plants. In addition, Davis-Besse, Perry and Beaver Valley contribute $29 million each year in state and local tax revenues that support local schools, police and fire departments and other vital public services.
We’re encouraged by the recently announced U.S. Department of Energy study to examine the full value that baseload generation plants fueled by coal and nuclear provide to our nation’s grid, economy and energy security. Among other issues, the study will focus on the reasons why these plants are prematurely closing, the risk to national and economic security if these closures continue, and what can be done to prevent further loss.
I commend the Trump Administration – and specifically Energy Secretary Rick Perry – for spearheading this review, and we are fully committed to supporting this effort. At the same time, we’re continuing to pursue other options designed to preserve these essential energy resources in the years ahead.
For example, we strongly support Ohio’s new Zero-Emissions Nuclear Resource, or ZEN, legislation introduced by Senators Ecklund and LaRose and Representative DeVitis. ZEN would compensate nuclear plants on a per-megawatt basis for the unique benefits they bring to Ohio’s environment, fuel diversity, energy security and resiliency. New York and Illinois have used a similar mechanism to ensure the continued operation of four nuclear facilities in those states.
These state programs are designed to ensure that the carbon-free and other environmental advantages as well as the fuel-diversity and economic benefits of nuclear generation remain available for many years to come. And the need for this action is demonstrated by the fact that nuclear facilities across the nation are closing prematurely. For example, four nuclear facilities in Wisconsin, Vermont and Nebraska have already shut down, and at least seven others across this region are in danger of closing.
We simply cannot allow this to happen in Ohio and Pennsylvania – so if you share our concerns and live in either state, I encourage you to reach out to your local senator or representative.
A strong offense also means making the right investments in our electric system – and ensuring we receive fair and adequate rate recovery for those investments. Regarding the latter, we have achieved several hard-earned successes since the beginning of 2016 that will enable our electric utilities to recover well over a half a billion dollars in incremental revenue in the years ahead.
In Ohio, the Public Utilities Commission approved modifications to our comprehensive Electric Security Plan Four. The plan’s Ohio Distribution Modernization Rider enables Toledo Edison, Ohio Edison and The Illuminating Company to collect approximately $200 million annually through 2019, with a possible two-year extension. The resulting revenue could be used to support major upgrades to our electric system in Ohio.
In January of this year, the Pennsylvania Public Utility Commission approved a base rate case settlement that will help support and build on the significant service reliability enhancements we’ve made in recent years to benefit our 2 million customers in that state. The ruling will result in approximately $290 million in incremental annual revenue for our four Pennsylvania utilities.
In New Jersey, the Board of Public Utilities issued an order adopting a Jersey Central Power & Light rate settlement that increases revenues $80 million annually and approved the accelerated recovery of our deferred storm-related costs in the state. And, in West Virginia, the state’s Public Service Commission approved a settlement agreement with our Mon Power and Potomac Edison utilities that allows for recovery of costs for fuel, purchased power expenses, energy efficiency programs and environmental controls.
We also created a new transmission affiliate – Mid-Atlantic Interstate Transmission, or MAIT – and filed for implementation of forward-looking formula rates. These actions will help us more effectively finance and build transmission facilities within our Met-Ed and Penelec service areas.
Investment in major transmission projects will help us meet the future energy needs of our customers while creating growth opportunities for your company in the years ahead. We recently completed phase one of our Energizing the Future transmission investment program – and will spend an additional $4.2 to $5.8 billion through 2021 on projects that will help ensure our customers continue to benefit from a highly reliable, more resilient and more secure grid.
We’re also investing in customers through our Pennsylvania smart meter program, which is approaching the halfway point of one million meters installed in the state. More important, customers with smart meters now can access more detailed energy usage information through our Home Energy Analyzer tool, which helps them better understand their energy use and make informed decisions on how to manage their electricity consumption. We plan to deploy smart meters to nearly all of our 2 million Pennsylvania customers by mid-2019, and we’re also exploring the installation of similar smart technologies in our Ohio service area in the years ahead.
You might be familiar with an advertising campaign we’re running right now called “You First.” We’re using it to promote a range of smart products and services that place the customer first – from energy efficiency programs that can help you save energy and money, to warranty programs that protect your home’s major appliances. I encourage you to visit our new microsite, youfirstenergy.com, to find out more about these and other products offered by our electric utilities.
I’ve been in this business for nearly 40 years, and the most important thing I’ve learned over the past four decades is that if you take care of the customer, everything else will take care of itself. In other words, strong customer-focused businesses tend to be the most successful businesses.
I’ve also worked on both sides of the company, regulated and competitive – and I firmly believe that the regulated model offers the best opportunities to provide customers with the safe, reliable, clean and affordable service they expect and deserve.
I’m proud of what our employees do every day to sustain that level of service, and I’m very grateful for their dedication to safe work practices. However, we can’t be satisfied with our safety performance until we reach our ultimate objective – having every employee return home safely every day. Although our employees achieved the best safety record in our company’s history in 2016, on April 30 of this year, a Penn Power lineman was fatally injured in a worksite accident. This tragic incident is a reminder that we need to remain vigilant in ensuring that safety remains our number one priority. Our sympathies are with the friends and family of J.D. George.
I’d also like to reiterate George Smart’s heartfelt comments regarding Yank Heisler, who passed away on April 11. I knew Yank as both a colleague and a friend, and I always greatly appreciated his counsel and support as he helped our company overcome a number of significant challenges over the years. My deepest sympathies go out to his wife, Lynn, their four children and all of Yank’s friends who are here with us today.
In closing, let me emphasize that I’m confident the dedicated efforts of our employees will make the difference as we complete our transition to a more fully regulated company – one that is better positioned to meet the energy needs of our customers, provide strong support to our communities and deliver greater value to our shareholders in the years ahead.
Now I would like to take a few questions from the audience. If you have a question, please raise your hand and wait for a microphone, and please limit your questions and comments to two minutes. I apologize in advance if we cannot answer every question.
Thank you for joining us here this morning. And on behalf of our FirstEnergy team, we appreciate your continued support of our company. See you next year.
Forward-Looking Statements: This news release includes forward-looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements include declarations regarding management's intents, beliefs and current expectations. These statements typically contain, but are not limited to, the terms “anticipate,” “potential,” “expect,” "forecast," "target," "will," "intend," “believe,” "project," “estimate," "plan" and similar words. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, which may include the following: the ability to experience growth in the Regulated Distribution and Regulated Transmission segments and the effectiveness of our strategy to transition to a fully regulated business profile; the accomplishment of our regulatory and operational goals in connection with our transmission investment plan, including, but not limited to, our planned transition to forward-looking formula rates; changes in assumptions regarding economic conditions within our territories, assessment of the reliability of our transmission system, or the availability of capital or other resources supporting identified transmission investment opportunities; the ability to accomplish or realize anticipated benefits from strategic and financial goals, including, but not limited to, the ability to continue to reduce costs and to successfully execute our financial plans designed to improve our credit metrics and strengthen our balance sheet through, among other actions, our cash flow improvement plan and other proposed capital raising initiatives; success of legislative and regulatory solutions for generation assets that recognize their environmental or energy security benefits; the risks and uncertainties associated with the lack of viable alternative strategies regarding the Competitive Energy Services (CES) segment, thereby causing FirstEnergy Solutions Corp. (FES), and possibly FirstEnergy Nuclear Operating Company (FENOC), to restructure its debt and other financial obligations with its creditors or seek protection under United States bankruptcy laws and the losses, liabilities and claims arising from such bankruptcy proceeding, including any obligations at FirstEnergy Corp.; the risks and uncertainties at the CES segment, including FES and its subsidiaries and FENOC, related to continued depressed wholesale energy and capacity markets, and the viability and/or success of strategic business alternatives, such as pending and potential CES generating unit asset sales, the potential conversion of the remaining generation fleet from competitive operations to a regulated or regulated-like construct or the potential need to deactivate additional generating units; the substantial uncertainty as to FES’ ability to continue as a going concern and substantial risk that it may be necessary for FES, and possibly FENOC, to seek protection under United States bankruptcy laws; the risks and uncertainties associated with litigation, arbitration, mediation and like proceedings, including, but not limited to, any such proceedings related to vendor commitments, such as long-term fuel and transportation agreements; the uncertainties associated with the deactivation of older regulated and competitive units, including the impact on vendor commitments, such as long-term fuel and transportation agreements, and as it relates to the reliability of the transmission grid, the timing thereof; the impact of other future changes to the operational status or availability of our generating units and any capacity performance charges associated with unit unavailability; changing energy, capacity and commodity market prices including, but not limited to, coal, natural gas and oil prices, and their availability and impact on margins; costs being higher than anticipated and the success of our policies to control costs and to mitigate low energy, capacity and market prices; replacement power costs being higher than anticipated or not fully hedged; our ability to improve electric commodity margins and the impact of, among other factors, the increased cost of fuel and fuel transportation on such margins; the uncertainty of the timing and amounts of the capital expenditures that may arise in connection with any litigation, including New Source Review litigation, or potential regulatory initiatives or rulemakings (including that such initiatives or rulemakings could result in our decision to deactivate or idle certain generating units); changes in customers' demand for power, including, but not limited to, changes resulting from the implementation of state and federal energy efficiency and peak demand reduction mandates; economic or weather conditions affecting future sales and margins such as a polar vortex or other significant weather events, and all associated regulatory events or actions; changes in national and regional economic conditions affecting us, our subsidiaries and/or our major industrial and commercial customers, and other counterparties with which we do business, including fuel suppliers; the impact of labor disruptions by our unionized workforce; the risks associated with cyber-attacks and other disruptions to our information technology system that may compromise our generation, transmission and/or distribution services and data security breaches of sensitive data, intellectual property and proprietary or personally identifiable information regarding our business, employees, shareholders, customers, suppliers, business partners and other individuals in our data centers and on our networks; the impact of the regulatory process and resulting outcomes on the matters at the federal level and in the various states in which we do business including, but not limited to, matters related to rates; the impact of the federal regulatory process on Federal Energy Regulatory Commission (FERC)-regulated entities and transactions, in particular FERC regulation of wholesale energy and capacity markets, including PJM Interconnection, L.L.C. (PJM) markets and FERC-jurisdictional wholesale transactions; FERC regulation of cost-of-service rates; and FERC’s compliance and enforcement activity, including compliance and enforcement activity related to North American Electric Reliability Corporation’s mandatory reliability standards; the uncertainties of various cost recovery and cost allocation issues resulting from American Transmission Systems, Incorporated 's realignment into PJM; the ability to comply with applicable state and federal reliability standards and energy efficiency and peak demand reduction mandates; other legislative and regulatory changes, including the new federal administration's required review and potential revision of environmental requirements, including, but not limited to, the effects of the United States Environmental Protection Agency’s Clean Power Plan, Coal Combustion Residuals regulations, Cross-State Air Pollution Rule and Mercury and Air Toxics Standards programs, including our estimated costs of compliance, Clean Water Act (CWA) waste water effluent limitations for power plants, and CWA 316(b) water intake regulation; adverse regulatory or legal decisions and outcomes with respect to our nuclear operations (including, but not limited to, the revocation or non-renewal of necessary licenses, approvals or operating permits by the Nuclear Regulatory Commission or as a result of the incident at Japan's Fukushima Daiichi Nuclear Plant); issues arising from the indications of cracking in the shield building at Davis-Besse; changing market conditions that could affect the measurement of certain liabilities and the value of assets held in our Nuclear Decommissioning Trusts, pension trusts and other trust funds, and cause us and/or our subsidiaries to make additional contributions sooner, or in amounts that are larger than currently anticipated; the impact of changes to significant accounting policies; the impact of any changes in tax laws or regulations or adverse tax audit results or rulings; the ability to access the public securities and other capital and credit markets in accordance with our financial plans, the cost of such capital and overall condition of the capital and credit markets affecting us and our subsidiaries; further actions that may be taken by credit rating agencies that could negatively affect us and/or our subsidiaries’ access to financing, increase the costs thereof, increase requirements to post additional collateral to support, or accelerate payments under outstanding commodity positions, letters of credit and other financial guarantees, and the impact of these events on the financial condition and liquidity of FirstEnergy Corp. and/or its subsidiaries, specifically FES and its subsidiaries; issues concerning the stability of domestic and foreign financial institutions and counterparties with which we do business; and the risks and other factors discussed from time to time in our United States Securities and Exchange Commission (SEC) filings, and other similar factors. Dividends declared from time to time on FirstEnergy Corp.'s common stock during any period may in the aggregate vary from prior periods due to circumstances considered by FirstEnergy Corp.’s Board of Directors at the time of the actual declarations. A security rating is not a recommendation to buy or hold securities and is subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. These forward-looking statements are also qualified by, and should be read in conjunction with the other cautionary statements and risks that are included in our filings with the SEC, including but not limited to the most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. The foregoing review of factors also should not be construed as exhaustive. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements. We expressly disclaim any current intention to update, except as required by law, any forward-looking statements contained herein as a result of new information, future events or otherwise.