第一能源 (FE) 2012 Q4 法說會逐字稿

Greetings and welcome to the FirstEnergy Corp. fourth-quarter 2012 earnings 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, Meghan Beringer, Director, Investor Relations for FirstEnergy Corp. Thank you, Ms. Beringer. You may begin.

Thank you and good afternoon. During this conference call, we will make various forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, prospects, and other aspects of the business of FirstEnergy Corp. are based on current expectations that are subject to risks and uncertainties. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please read the Safe Harbor statement contained in the Consolidated Report to the Financial Community, which was released earlier today and is also available on our website under the Earnings Release link.

Reconciliations to the non-GAAP earnings measures we will be referring to today are also contained in that report, as well as on the Investor Information section on our website at www.firstenergycorp.com\ir.

Participating in today's call are Tony Alexander, President and Chief Executive Officer; Leila Vespoli, Executive Vice President and General Counsel; Jim Pearson, Senior Vice President and Chief Financial Officer; Donny Schneider, President of FirstEnergy Solutions; Harvey Wagner, Vice President, Controller, and Chief Accounting Officer; Steve Staub, Vice President and Treasurer; and Irene Prezelj, Vice President, Investor Relations.

I will now turn the call over to Tony.

Thanks, Meghan, and good afternoon, everyone. Thank you for joining us. Today I'll provide a general overview of last year's results and accomplishments before moving to some of our key areas of focus for 2013. Leila will join us for a brief regulatory overview, and finally Jim will join the call for the first time in his new capacity as CFO. Jim will take a look back at the fourth quarter and the full year of 2012 and provide a preview of our 2013 financial objectives. I'm sure most of you already know Jim from his tenure as Treasurer, so we expect this transition to be quite smooth. And, of course, Mark Clark remains involved in key Company projects in his new role as Executive Vice President of Finance and Strategy.

I would also like to take a moment here to thank Harvey Wagner for his exceptional guidance and oversight as our Vice President, Controller, and Chief Accounting Officer, and I wish him best in his upcoming retirement.

Okay, let's get started. Today we announced full-year non-GAAP earnings of $3.34 per share, in line with our guidance. Despite the absence of a meaningful rebound in the regional economy and energy markets, we accomplished much in 2012, and I'll start by walking through some of the highlights.

First, we maintained our dividend, which is supported by the solid and stable returns from our regulated distribution and transmission business segments, and we maintained our credit ratings through very challenging economic conditions. Our competitive strategy at FirstEnergy Solutions continues to produce significant growth. FES now serves 2.6 million retail customers, which is an increase of 42% compared to the end of 2011, and FES grew direct sales by 18% during the year.

Our nuclear fleet achieved strong safety and operational performance. This includes the industry's lowest worker dose exposure at our Beaver Valley units and our best-ever fleet force loss rates. Force loss rates were industry top decile at Beaver Valley Unit 1 and top quartile at Beaver Valley Unit 2 and Davis-Besse.

At our fossil fleet, we deactivated units at seven of our older coal-fired plants in response to MATS and other environmental regulations that made these plants even less likely to be dispatched. We also plan to deactivate several additional units in early 2015 at the conclusion of reliability, must-run arrangements.

At our remaining fossil units, we have taken an aggressive look at the capital investment required to comply with these environmental standards. After a rigorous analysis of the necessary environmental controls, we have reduced our projected spend to $200 million to $975 million, down from an original estimate of $2 billion to $3 billion.

We also took proactive measures to implement more efficient fuel and dispatch strategies; trim maintenance costs; enhance operational flexibility; and reorganize certain areas of business to ensure more appropriate staffing levels and reduced costs in light of the economy.

On the regulatory front, the Public Utilities Commission of Ohio approved our electric security plan. This new ESP, which takes us through May 31, 2016, is essentially an extension of our existing plant. Our ESP has been widely considered a success in terms of its ability to produce competitively-priced electricity for customers who remain with the utility for generation service, as well as creating a level playing field among suppliers competing to serve customers who choose to shop.

On the financial side, we made a $600 million contribution to the pension plan in early 2012 and pursued an early buyout of the Bruce Mansfield sale leasebacks, taking future obligations off the table.

And finally, today marks the two years since we closed our merger with Allegheny. We remain very pleased with this combination. It has produce cost savings and increased our operating flexibility while also expanding our pool of leadership talent.

I'm very proud of these achievements. Our focus on our three core business segments -- generation, distribution, and transmission -- offers greater flexibility and more growth opportunities and financial stability than any one business could provide on a standalone basis. And our strategy remains unchanged. We are prepared to meet the economic and regulatory challenges of 2013 while positioning our Company for long-term growth. Our plan includes a focus on controlling costs, continuing to improve our operational performance and exploring opportunities to grow our regulated and competitive businesses.

I'll discuss these opportunities in more detail starting with utilities where we are working to promote growth on several fronts. For example, we have joined an industry electrification effort that is offering electric power at truck stops as an alternative to running diesel engines overnight. This is a particularly attractive alternative in areas that are not meeting Clean Air Act quality standards.

We are also very active in economic development efforts related to the Utica and Marcellus shale boom in or near our Pennsylvania, West Virginia, and Ohio service territories. This includes initiatives like building a new Black River substation that is about to go online in Lorain, Ohio. Our facility will support a major steel manufacturer that is expanding in response to the growth of the natural gas industry.

In our transmission business, we expect our investments within the FirstEnergy footprint to continue providing growth and stable returns. In 2012 we consolidated ATSI and TrAIL under a large, stand-alone transmission subsidiary holding company and put in place a $1 billion credit facility.

We also formulated a long-term plan for the ATSI region that includes a significant number of projects designed to support reliability in the Northern Ohio area, primarily in response to the plant deactivations brought on by MATS and other environmental regulations.

On a related note, we continue moving forward with American Municiple Power on the potential project announced in November to develop peaking capacity at our Eastlake plant near Cleveland. This project, which is subject to among other things, regulatory approval, could reduce our need for some of the previously-announced transmission projects and extend the timeframe for others.

Finally, we are also building a new transmission control center in the Akron area that will include advanced technology to enhance service reliability across our entire footprint.

Turning now to FirstEnergy Solutions, our focus remains on expanding our retail business and strengthening our brand among customers in both new and existing targeted markets. Governmental aggregation is an area where we've had tremendous success, and it will remain a priority in 2013. Last year FirstEnergy Solutions signed contracts with 160 communities, including more than 100 in Illinois. Today, FES serves this sales channel with more than 17 million megawatt hours, a 10% increase over 2011, and we continue to see potential for more growth in both southern Ohio and Illinois.

We project annual FES sales growth of about 3% to 5% over the next few years. In 2013 we expect continued benefits from our strategy of first mover advantage and shifting megawatt hours between sales channels as as we remain focused on both volume and margin.

As you have heard us say over the years, we operate in many ways like a traditional utility but without the geographic restrictions. By design, our customer portfolio continues to look a lot like that of a Midwestern utility. That's the type of load our plants were originally built to serve, and we continue to leverage our generation assets, selling the power that we produce to our end-use retail customers.

But our approach is much different from others in the electric retail market space. We have fully implemented a multi-channel sales approach, which means we go deep and wide in the territories we target. We strongly believe that this approach is far less risky and more profitable than simply focusing on one segment of the market. And it's allowing us to significantly grow our customer base in a cost-effective fashion, while also taking advantage of opportunities to increase our profitability.

In addition, our balanced portfolio provides greater stability over the long-term and diversifies our risk. And our integrated asset-backed strategy offers flexibility as we work to reduce costs and maximize margins.

Finally, as our competitive sales continue to grow over time and markets begin to improve, we plan to reinvest or re-visit our fleet investment strategy that we call mining our assets. This approach focuses on improving efficiencies, lowering forced loss rates and upgrading equipment at existing plants as markets justify instead of making investments in costly new generation.

In the past, this successful strategy allowed us to add more than 600 megawatts of capacity with far less risk and at a fraction of the cost of building in a new plant.

The mining -- our asset approach provides an incremental platform for our generation capabilities to support sales growth. We will take a very competitive-minded approach to these investments, spending capital on improvements only after sales have been committed to support them. In doing so, we expect the timing of these investments to be linked closely to the growth of our retail business. These plans represent short- and long-term examples of how we are managing our business for the current market conditions while preparing for the eventual economic improvement. As more generating units are deactivated due to environmental regulations and natural gas and power prices rise, we would expect an improved supply/demand balance. And at that point, the groundwork we are laying today should help accelerate our growth.

We have a strong track record of delivering on our plans, and that is how we are approaching 2013. We expect this to be a year of executing on our strategies and implementing the plans we have described. And we believe this approach will result in an even stronger Company that is well-positioned for the future.

Now I'll turn it over to Leila for a look at our regulatory priorities for 2013. Leila?

Thanks, Tony. We have a full plate of regulatory and legislative issues before us this year with significant activity in four states. I'll go through the agenda state by state, starting with Pennsylvania.

In December we filed a Smart Meter Deployment Plan with the Pennsylvania Public Utility Commission or PUC. Hearings have been scheduled for May, and I would anticipate final approval by September. The plan calls for deployment over the period 2013 through 2019 with an estimated cost of a completion of about $1.25 billion. Cost recovery is expected to occur through the existing smart meter technology surcharge.

We also filed a change to our Default Service Supply Plan in Pennsylvania, which shifted procurement to two auctions per year from four. The second 2013 auction was completed on February 12. FirstEnergy Solutions participated and won 24 out of 75 tranches.

In response to the PUC's guidance and its retail market investigation, last year we adopted elements of the PUC's earlier recommendations in our default service plan for the period June 2013 through May 2015. We will continue working with the PUC and other stakeholders to roll out a fair and robust competitive market.

A retail market investigation has also been launched by the Public Utility Commission of Ohio. While we do not anticipate significant changes to the Ohio market rules, we share the commission's objective, to expand retail competition throughout Ohio.

Currently 77% of our Ohio utility load has selected an alternative supplier, and Ohio competitive markets have developed well, despite being hindered by some lingering subsidies. A three-year option auction for generation supply for our Ohio utility customers was conducted on January 22, resulting in a price of $59.17 per megawatt hour. FirstEnergy Solutions participated and won five of the 17 tranches available for bid, very much consistent with FES's business plan.

The next auction is scheduled for October 2013.

Also in Ohio, we have an active case with respect to an audit of the alternative energy rider, which recovers costs associated with procurement of renewable energy credits.

As you recall, our Ohio utilities purchased these RECs at market price in 2009 through 2010 to comply with the state's alternative energy law.

Now certain parties have suggested that we should have rejected available RECs and instead either paid a penalty or otherwise petition the Commission for relief. However, Ohio law does not give the commission the authority to relieve us from our statutory requirements when RECs are available.

We will continue to participate in these proceedings, which include a public hearing that commenced on February 19 with a decision expected late second or early third quarter.

As of July 31, 2013, we will have collected all but $4.9 million of the costs at issue.

I'll take a moment here to discuss Hurricane Sandy, which affected practically our entire service area. The total costs associated with the restoring service and rebuilding damaged part of our system in five states is approximately $860 million. A state-by-state breakdown of the capital, expense and cost deferral is available in the Consolidated Report to the Financial Community, which was posted to our website this morning.

In New Jersey where the damage from Hurricane Sandy was the most devastating, our costs were about $630 million. As you know, we filed a base rate case for JCP&L in November as required by the New Jersey Board of Public Utility. On February 22 we amended the case to include $603 million of the distribution costs related to Hurricane Sandy, including approximately $345 million for capital expenditures incurred while restoring service, as well as $258 million in deferred expenses that we propose to recover over a six-year period.

Despite the massive damage and spending on restoring power to JCP&L customers after this historic storm, the impact on our customer rates is still in the single digits, and JCP&L's rates remain the lowest among New Jersey utilities regulated by the BPU.

Let's look now at West Virginia. The proposed transaction to transfer full ownership of the Harrison plant to our Mon Power power subsidiary is important both for the state and the Company. We discussed last quarter this transfer is a part of a resource plan to address a capacity shortfall related to the deactivation of more than 600 megawatts of older regulated generating capacity due to environmental regulation. It is expected to help ensure reliable power for our Mon Power and Potomac Edison customers in West Virginia for many years to come.

The Harrison facility is equipped with modern emission control, and it produces electricity with coal mined in the state. We believe that this transaction is very positive for the economy of West Virginia.

Under the proposed terms, Mon Power would require the remaining 80% of the Harrison plant giving the utility sole ownership of the 1984 megawatt facility.

In addition, Mon Power would sell its 8% minority interest or about 100 megawatts in the Pleasant power station to Allegheny Energy Supply.

The proposed asset transfer requires approval of the West Virginia Public Service Commission and the Federal Energy Regulatory Commission. We are well along in the discovery process, and the West Virginia Coal Association and the IBAW have gone on record with the PUC in support of the transaction.

Earlier this month, we received a procedural schedule that set hearings in the case for May 29 through May 31.

Finally, we have announced that the temporary surcharge that will be used to recover transaction-related expenses once the transfer is approved will have a price tag of less than $1 per month for typical residential customers compared to the prices they were paying in 2012. Mon Power and Potomac Edison have also agreed to file a base rate case no later than six months after the transaction closes to help define the end of that surcharge. We would expect the rate case proceeding to take about 12 months to complete.

Thank you for your time. Now I will hand over the call to Jim for a review of the fourth-quarter results and our 2013 financial objectives.

Thank you, Leila. I'm pleased to be here today. I've enjoyed getting to know many of you over the past several years, and I look forward to meeting more of you in my new role.

Today I will review the fourth-quarter and full-year 2012 results, then close with the discussion of our 2013 financial plan. Before I move on to our 2012 results, I want to reaffirm our non-GAAP earnings guidance for 2013 of $2.85 to $3.15 per share. Let's turn now to the consolidated report as I walk through our results.

Looking at the fourth quarter of 2012, non-GAAP earnings were $0.80 per share, while GAAP results were a loss of $0.35 per share. As I will discuss in a moment, our fourth-quarter and full-year GAAP results were significantly impacted by pension accounting. In the fourth quarter of 2011, non-GAAP earnings were $0.77 per share, while GAAP earnings were $0.23 per share.

For the year, our non-GAAP earnings are $3.34 per share, and as Tony said, that is in line with our 2012 guidance. Full-year 2012 GAAP earnings are $1.85 per share. These results compare to 2011 non-GAAP earnings of $3.64 per share and GAAP earnings of $2.22 per share.

On pages four and 20 of the consolidated report, you can find a list of special items that make up the difference between the GAAP and non-GAAP results.

As I mentioned, the largest of these special items is the mark-to-market adjustment for pension and OPEB accounting, which was a negative $0.91 per share in the fourth quarter, primarily related to a reduction in the discount rate.

As you may recall, last year we adopted a change in accounting where we will annually recognize any adjustments from deviations in actuarial assumptions in the year incurred versus amortizing them over a number of years. In 2011 this adjustment was $0.74 per share, but it was more than offset by a one-time gain from the sale of non-core assets.

Other special items for the fourth quarter of 2012 include plant deactivation costs, which decreased GAAP earnings by $0.12 per share; a decrease of $0.04 per share from impacts of the sale or impairment of non-core assets; other mark-to-market gains of $0.03 per share; a decrease of $0.03 per share related to merger accounting for commodity contracts; and $0.02 per share in merger-related costs; a decrease of $0.02 per share related to tax legislative changes; regulatory charges of $0.02 per share; trust securities impairment of $0.01 per share; and a charge of $0.01 per share for restructuring costs.

Moving now to the drivers of our ongoing results. Clearly, Hurricane Sandy had a significant impact on our Company during the quarter. Approximately 10,000 employees from across the Company were dedicated to storm restoration efforts from late October through mid-November, redeploying them to capital work instead of O&M. Regulated distribution O&M expense, net of storm deferrals, decreased in the quarter as a result of this massive redeployment of the workforce. O&M also benefited from lower expenses related to our fossil and nuclear plants, as well as the coal units we deactivated in the third quarter. These items in total increased earnings by $0.08 per share.

Let's turn now to distribution deliveries, which increased earnings by $0.04 per share. Overall deliveries increased 252,000 megawatt hours or about 1%. Commercial deliveries were essentially flat, while industrial deliveries were down 3% compared to the fourth quarter of 2011, largely due to reduced operations by many of our large steel, automotive, and refinery customers.

Residential deliveries increased by 5% quarter over quarter, influenced by colder weather versus the same period in 2011.

With regard to economic recovery in our service territory, we still have a ways to go. Full-year 2012 sales adjusted for weather show that residential volumes are now on par with the levels we experienced in 2007. However, commercial sales remained down 5%, and industrial sales are still 8% below pre-recession levels. Further, while industrial sales have improved versus their 2009 low point, they have been basically stagnant for the past three years.

Moving back to the fourth-quarter drivers, 2012 earnings also benefited by a total of $0.04 per share, primarily as a result of investment income as we rebalanced our nuclear decommissioning trust portfolio and general taxes. Commodity margin reduced earnings by $0.08 per share in the quarter.

Looking at commodity margin from a high level, the execution of our retail strategy resulted in a sales gain of $0.11 per share, but this was offset by a $0.19 per share decrease in capacity revenues due to lower capacity prices.

It should be noted that capacity prices in PGM during the June 2012 through May 2013 and June 2013 through May 2014 planning years are at historic lows in the range of $16 to $28 per megawatt day, primarily as a result of auctions in the 2009 and 2010 periods that were at the depths of our recession.

Further, the June 2014 through May 2016 planning years, as a result of auctions conducted in 2011 and 2012, prices are substantially higher, in the $100-plus per megawatt day range.

On a more granular scale, overall contract sales increased 10% or $0.07 per share, and once again, the volume gains in contract sales offset the impact of lower market prices. Governmental aggregation sales increased 29% in the quarter, driven primarily by new contracts in Illinois. Mass-market sales rose 72% with much of that growth in Pennsylvania. And sales to large commercial and industrial customers increased 6% as new customers in southern Ohio offset lower use by some of our large commercial customers in our Ohio and Pennsylvania utility service territory.

Finally, polar sales continue to decrease, consistent with our retail strategy to realign our sales portfolio.

I will mention here that FirstEnergy Solutions' hedged position for the balance of 2013 is currently at 96%. Commodity margin in the fourth quarter also benefited from lower capacity expense, lower fuel expense related to increased nuclear output in the generation mix, and gains from net financial sales and purchases. These were offset by lower PJM capacity revenues, as I mentioned earlier; a decrease in wholesale sales due to higher contract sales and lower generation output; higher purchased power costs, mainly related to having Sammis temporarily off-line and serving more customers; higher transmission expense; and lower sales of renewable energy credits.

While 2012 commodity margin was negatively impacted by lower capacity revenues and a lower average rate of $56 per megawatt hour, we are pleased with the progress that FirstEnergy Solutions is making. We ended the year with 100 million megawatt hours in competitive sales, a 10% increase compared to 2011, and we grew our retail customer base by 42% through the continued success of our multi-channel strategy.

Respecting our 2012 financial plan, we funded the Bruce Mansfield sale leaseback repurchase and took out additional nuclear sale leasebacks. We also contributed $600 million to the pension fund, putting the pension plan in a position to be fully funded once the discount rate returns to more historic levels. For example, like those adopted by Congress for determining funding obligations. And while we remain generally on track to achieve our overall goals, the cash requirements from the ratio and Hurricane Sandy put some additional pressure on our balance sheet.

Looking now at 2013, our financial plan is structured to improve the balance sheet, enhance liquidity, and maintain investment-grade credit metrics. The plan initially focuses on reducing debt at our competitive companies, primarily FES and Allegheny supply by at least $1.5 billion. The proceeds of the Harrison/Pleasant's transaction in West Virginia combined with asset sales are expected to be sufficient to fund the debt reduction. The assets we intend to sell are primarily our competitive hydro fleet, which includes nearly 1180 megawatts that were initially in our plans to be sold in 2015.

We are expecting to retire a combination of both tax-exempt bonds and taxable debt to achieve these debt reductions. While we have not looked to target taxable debt in recent years, it is now on our list of potential actions as we wave the redemptions costs against the benefits of future interest savings from the current low interest environment.

On the liquidity front, we are also working to refinance short-term borrowings with long-term debt as appropriate at our utilities and possibly at the corporate level. This refinancing activity would term out some of our revolver borrowings and, again, take advantage of today's historically low interest rates to position ourselves for the future. We are also working with our banks to extend the maturity of existing credit facilities totaling $5.5 billion for an additional year to 2018.

We believe this is a comprehensive plan that moves us where we would like to be in terms of our credit metrics and, once completed, would significantly improve the balance sheet, especially at our competitive operations. As Tony outlined, we are focused on growth across each of our businesses, including investments in new transmission projects and growing our competitive business.

As we address these opportunities, we believe a modest amount of equity late this year of up to $300 million, subject to market and other conditions, will help to further strengthen our balance sheet and investment-grade metrics and support our growth initiatives. We will explore options, which may include implementing a dribble program late this year to effectively address these ongoing requirements.

Importantly, this level of equity will not take us off course from the guidance we have reaffirmed for 2013.

Finally, while it is always subject to Board approval, I will reiterate that we expect to maintain our dividend. Our regulated operations, distribution, and transmission provide a strong foundation of earnings and cash, which support the dividend, and our competitive businesses further support the payout.

As we move forward, we will continue to assess our operations and look for additional opportunities to reduce our costs. Most importantly, we remain well positioned to take advantage of opportunities created by expanded competitive markets and improved economic conditions.

Now I'll ask the operator to open up the call for questions.

(Operator Instructions). Dan Eggers, Credit Suisse.

Jim, following up on where you left off on your comments just with the fund-raising options between the Harrison transfer, the nearly 1200 megawatts of hydro sale and the $300 million of equity, even using pretty conservative assumptions, it seems like you will get well past the $1.5 billion debt pay down target you guys have talked about. How do we put that level of fundraising in context with the strategy of getting down to the $1.5 billion? What happens with the excess money?

Well, Dan, as Tony alluded to, we're in the midst of a growth program, also. We're investing in our transmission facilities. In conjunction with the Harrison assets transfer, we're going to have an equity infusion down into the Mon Power level. We are also growing our competitive business. And as we said, we believe the finance plan we have laid out with the asset transfer, as well as the asset sales, will more than cover the $1.5 billion. But with our focus on growth, we thought it would be prudent to add a bit of equity to the mix.

And then if you look out to 2014 and beyond, do you see the need to continue raising equity at that kind of rate to support the growth program, or is this just a rebalancing opportunity in your mind?

At this point, Dan, I would consider it a rebalancing. But as we go out into the future and continue to look at our growth opportunities, we will always consider equity in the mix.

And if Donny is on the phone, Donny, can you talk a little bit about with 96% hedged for 2013 how the volume targets have matched off against what you guys provided at EEI and just any customer segments that are doing better or worse than what you thought you were going to be doing?

Sure, Dan. So our target hasn't changed. I think at EEI we said 104 terawatt hours. I would tell you that I have a boss that continually challenges me to exceed that, so we'll see how the year progresses. The 94% is against that original target, though.

And are you seeing customer cost mix consistent with original expectations or some movement?

It's still pretty much in line. We have really done well in our mass-market sales. We have just recently launched our customer choice campaign, and we would see that bringing in additional mass-market customers, along with continuing to push on [Gov A].

Okay. Got it. Thank you, guys.

Julien Dumoulin-Smith, UBS.

Just following up on Dan's last question there, with respect to asset sales, et cetera, how does the $300 million jibe against expectations there? If you could just be a little bit more explicit.

Well, I will just give you my perspective on it. I think the transactions we otherwise have laid out for the asset sales at Harrison will be more than adequate to carry out the game plan that we've laid out for debt reduction.

The $300 million we talked in terms of equity are going to help support some of the growth initiatives that we have going on throughout the Company, including the transmission expansion plans that we have; several plans to increase the capacity at several of our nuclear plants through new turbines; and things of that nature, that are beginning to position the Company for longer-term growth as this economy improves.

Great. And could you speak to the timing of asset sales? Is it a this year event, or is this over the next couple of years or what have you?

Well, I think the key one that we are talking about at this point -- there's always an opportunity for asset sales, as you guys well know from what we've done over the last several years. But the key one being the hydro sale, we would like to complete this year, and that is what we are targeting to accomplish.

Okay. And then perhaps going back broadly and tying retail back into this, as I heard your comments, you described growing retail broadly speaking. How does that jive with asset sales here? I mean are we talking about potentially adding selective assets in markets where perhaps you might want to serve more from your generation, i.e., Eastern PJM or something?

Well, not at this point. I think at this point what we are looking at is allowing sales to drive generation investment. And I have confidence in Donny and his team to drive retail sales to levels beyond where we're at today such that beginning to reinvest in our power plants to reduce forced loss rates, make them more efficient so we can get more kilowatt hours out of the same machines will be where most of our investment is targeted.

In the near-term, much of that investment is being targeted toward the nuclear upgrades in the -- not only at Beaver Valley in 2012, but 2013 we have upgrades at both Perry and Beaver Valley 1 for new turbines. But we have some major investments in the nuclear fleet with respect to steam generator replacements, which will reduce our long-term O&M costs and give us -- in addition give us shorter outages, which will create more kilowatt hours from that fleet to be used and deployed in the retail strategy.

So there is a lot of activity going on, and there's a lot of opportunities yet inside the fleet to expand and become more effective with the machines we have before we look outside.

Great. Thank you. And just a real quick clarification -- given pension, mark-to-market, et cetera, pension funding plans as it stands today, there are no contributions projected for 2013 or beyond?

That is correct, Julien. Probably the first time that we would make a contribution would be 2016 for the 2015 planning years, and that's just based on current rates. So we don't have any expectation of making a contribution over the next several years.

Fantastic. Thank you.

Stephen Byrd, Morgan Stanley.

I wanted to just get your general thoughts on low growth outlook. I know there's a lot of unusual weather activity, and for the year, total load was up 70 basis points from last year. But as you mentioned in your prepared remarks, there was certainly a lot of movement within the investment classes. Could you just talk a little bit further about the three customer classes and your general views on the outlook for load growth amongst those three classes?

This is Jim. We are looking at load growth of about 0.5% to 0.6% next year. We see the residential and commercial areas just growing ever so slightly, and the industrial sector has been sluggish. Over the last three years, it has remained fairly stagnant. Now we are seeing some positive signs such as Ford. They're opening up a new engine plant. And we expect ultimately that we will start seeing industrial and commercial activity coming from the Marcellus and the Utica Shale that we have in our area. But I don't see that as active in 2013 as maybe it will be when we get out in 2014 and beyond.

And I think that's right, Steve. I'm being a little cautious in terms of how fast this economy will turn around. I think this area is poised to grow and grow at rates that are potentially far greater than what we've seen in the past because of the economic development potential for the Marcellus and Utica Shale.

We were all looking -- if you take a look across the area, Pennsylvania, West Virginia, Ohio, it basically sits under our service territory. There's a lot of expectations right now in terms of a manufacturing renaissance, taking advantage of the locational advantage they would have for energy. And we've hoped to see this as a catalyst for much more significant and much more sustained growth, not only in the manufacturing and industrial segments, but the fallout of that through the commercial and the residential markets.

So so much depends on what happens to the economy in general in terms of are we going to be growing or continuing to stagnate, and are we going to begin to use the resources we have as a country to really reposition the economic capability and potential, particularly of this region, to take advantage of.

Okay. That's very helpful. And then just one follow-up for Jim on the equity side of things. As you think about funding growth, you've mentioned up to $300 million to fund some of your growth objectives. Would you envision the dribble as being the primary method to achieve that?

There's various methods out there, Stephen. At this point, the dribble method is one that we like.

Understood. Thanks so much.

Jonathan Arnold, Deutsche Bank.

Just quickly, on the asset sales, are you looking, Tony, I want to make sure I heard this correctly exclusively at the hydro assets? Are there other things potentially on the table, or should we just really be focused on that?

I think that's the primary one, Jonathan. I mean there's always assets moving around in this Company because of just because of our location. For example, we have lots of resources and lots of land that sits above Marcellus and Utica Shale. So I suspect there will be some transactions like that. They will typically be one-offs. I think the real game here's going to be played on the hydro assets.

Okay. And have you disclosed what value is on those assets or anything other than just the megawatts?

I don't plan on telling anybody what the book value is.

Okay. And if I may, just on another front, there's obviously a lot of talk around the EPA planning to regulate the move forward on regulating carbon. Can you just talk about how that is factoring into your whole process around investment in the coal fleet? What are you thinking comes out of that process, and what sort of timeframe do you get enough clarity to be certain what you're doing on your existing plants will survive future regulation on the CO2 front? Anything you can tell us there.

Well, I guess, Jonathan, if I had all those answers, I'd feel really good about it. All I can tie you is I think we're preparing ourselves to deal with these issues as best we can. If you take a look at our fleet and you compare, for example, going back in time to either 1990 or 2005, which are the dates that have been thrown around to measure, we will have reduced our carbon footprint in our fleet significantly beyond what any expectations were at either the Kyoto Protocol of 1990 or in the 2005 baselines that were used before.

So we've done a lot -- a lot of the plants as they get shut down, reposition investing in the nuclear fleet to produce more out of that side of the house, has done -- has improved significantly and reduced significantly the amount of CO2 that our fleet produces.

So on balance, a lot of it depends on what the rules are and what the baseline is in terms of what the expectations are going forward. We all know that there is no technology today that is commercially available to address this issue in a major coal-fired facility. So there has to be a transition period. There has to be recognized -- somehow we have to recognize the timeframe associated with it. And quite frankly, I think our fleet is in a pretty good position.

All right. Thank you very much, Tony.

Neel Mitra, Tudor, Pickering.

Just a quick question. Can you give us a rough sense of what your earned ROEs were in 2012 and just what opportunities or whether you'd be in the rate case arena besides in New Jersey and Mon Power for the asset swap in the coming years?

This is Leila. We do provide information regarding our ROEs on an ongoing basis with our state utility commissions, the majority of which is publicly available. And what we are going to be doing, we are going to be pulling together our latest filings and hope to make them available in our investor presentation materials at a conference next week. But I think the long and the short of it is, we believe that our utilities are earning a fair return as permitted by state law.

Okay. Second question on the generation side, how willing are you to rely on the purchased power market to fund the retail sales? I know that now that you are running generation less, you are relying more on the purchased power market, and how far are you willing to go on that just in terms of how risky that is?

Well, obviously, when we think those issues through, the risk is associated more with the credit worthiness of the person that you're buying from. We will close positions against the sales that we make and then essentially re-close those positions using our own assets. Once we determine that the sale is sustainable and if we can increase the margin associated with that sale by essentially producing it ourselves.

Okay. Thank you.

Operator, we will take one more question.

Paul Patterson, Glenrock Associates.

You mentioned the manufacturing. We do have a bunch of new power plants that have been announced in Ohio and Pennsylvania. Some of them are merchant. And I'm just wondering, any thoughts about what that presents in terms of an opportunity to you or a competitive threat or just what you make of that?

Well, my own sense is that the market today has sufficient capacity in it. So investments in new generation of significant amounts is -- it could be a problem for the investors.

Okay. The hydro asset, it doesn't sound like you guys are talking much about the book value or anything. Can you give us a sense of what the capacity factor is on those plants?

Well, we probably could. I don't think we have it with us, but you've got to remember, you can't look at capacity factor for some of these plants or pump storage. So it's becomes relatively meaningless they really run during the day, and they are pumped up at night.

Okay.

They run a river kinds of facilities, the rest of them are -- I'm not sure capacity factor is particularly relevant.

Okay. But I guess what I am -- you know where I'm coming from. I am trying to figure out the margin, if you can tell us that, sort of as a sense as to what might be going away as you sell those.

We're not particularly concerned about it on our fleet.

Okay.

Again, because of the other options we have.

Okay, great. And then in terms of the Harrison plant, you guys mentioned in a December letter that if you didn't have 100% of the plant, you may not be able to offer it into the rpm auction at a price that would clear. Given now where the procedural schedule is, it looks like the approval is going to happen after the auction, how should we think about that?

Paul, this is Donny. We will bid the Harrison plant into the auction in May from FES's side of the equation.

But we should expect it to clear?

Well, we will treat it like we would any other generator that we bid in, Paul.

Yes, the asset is going to be bid in, I guess, by two entities. One will be the utility. They will choose what to bid, and the other one will be FES on their ownership, and they will choose what to bid.

Okay. And then just finally on the polar and the PUC in Pennsylvania, it seems like they've changed the rules. And I'm just wondering is that a lot more opportunity -- does that give you guys more opportunity on the retail side there?

Are you talking about where they are going with this shorter-term bids, Paul?

Yes. It sounds like they want to create more volatility, almost like they wanted to force people to shop or encourage them to shop, I guess, is a better way to put it.

Well, clearly, Pennsylvania has an objective. They would love to see 100% of the customers shop, and I think that those auctions are designed to do that. We've participated in those processes, and we're very comfortable competing both in the polar auctions, as well as the retail front.

Okay. Thanks a lot, guys. Thanks, Paul.

Thank you, Paul.

Okay. I'd like to thank everyone for joining us on the call today. Tony, Leila and I will be in New York next week for a conference, and we look forward to seeing many of you there. As always, we appreciate your support and your interest in FirstEnergy.

Thank you.

Thanks, everyone.

Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day. We thank you for your participation today.