第一能源 (FE) 2018 Q1 法說會逐字稿

Greetings, and welcome to the FirstEnergy Corp. First Quarter 2018 Earnings Conference Call. (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, Brenda, and good morning. Welcome to FirstEnergy's first quarter earnings call.

Today, we will make various forward-looking statements regarding revenues, earnings, performance, strategies and prospects. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by such statements can be found on the Investors section of our website under the Earnings Information link and in our SEC filings. We will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures can be found on the FirstEnergy Investor Relations website along with a presentation, which supports today's discussion.

Participants in today's call include Chuck Jones, President and Chief Executive Officer; Steve Strah, Senior Vice President and Chief Financial Officer; and several other executives in the room who are available to participate in the question-and-answer session.

Now I would like to turn the call over to Chuck Jones.

Thanks, Meghan. Good morning, everyone. Today, for the first time, we're reporting earnings that represent FirstEnergy as a fully regulated company. We had a strong first quarter with GAAP earnings of $2.55 per share and operating earnings of $0.67 per share.

Our GAAP earnings benefited from a $1.2 billion gain associated with the deconsolidation of FirstEnergy Solutions, all the subsidiaries and FirstEnergy Nuclear Operating Company. As you know, the FES and FENOC Boards of Directors approved a Chapter 11 filing for these entities on March 31. The filings do not include FirstEnergy or our distribution, transmission, regulated generation or Allegheny Energy Supply subsidiaries.

We recognize that these recent events, including FES announcement, that it intends to sell or deactivate 2 nuclear power plants in Ohio and 1 in Pennsylvania during the next 3 years, have been challenging for our employees. They're also difficult for the communities surrounding these plants that have worked hard to help preserve jobs and the many economic benefits that these generating units provide. We understand the importance of these plants to the regional economy and recognize that more than 5 million of our utility customers are still exposed to the uncertainty of competitive markets.

Therefore, I will continue personally to advocate for regulatory or legislative solutions, including FES' application for an emergency order under the Federal Power Act that recognize the attributes of fuel-secure baseload generation and to ensure our customers continue to have a stable, reliable power supply. I continue to believe we are doing long-term damage to our nation's infrastructure, and I intend to be a steady voice in pushing for more integrated policies and decision-making.

Today, we are extremely pleased to announce that we have reached an agreement in principle with 2 ad hoc groups of key FES creditors: the first representing a majority of all outstanding secured and unsecured funded debt at FES and its subsidiaries; and the second, including the majority of Bruce Mansfield certificate holders. The agreement affirms previously announced guarantees and assurances of certain FES employee-related obligations, which include unfunded pension and other employee benefits, and provides for the waiver of certain intercompany claims held by FirstEnergy, among them the $500 million secured credit facility, $200 million surety support and the rail settlement guarantee. It also provides substantial assistance from FirstEnergy on key business matters while FES and FENOC continue their restructuring process.

In addition, other major terms effective at emergence include: full release of all claims against FirstEnergy and related parties; a $225 million cash payment from FirstEnergy, which includes a reversal of the $88 million NOL prefiling purchase; a tax note from FirstEnergy up to $628 million due December 31, 2022, bearing interest at the prevailing treasury rate, which represents the estimated value of the worthless stock deduction and is designed to trade at the par value of the note when issued; the transfer of the Pleasants Power Station, which is currently owned by Allegheny Energy Supply, to FES for the benefit of creditors; and a right of FirstEnergy to share in recoveries after an agreed-upon threshold is met.

The agreement is subject to approval by the Boards of Directors of FirstEnergy, FES and its subsidiaries, FENOC and Allegheny Energy Supply, the execution of definitive agreements and the approval of the Bankruptcy Court and certain other conditions. The ad hoc group also agreed to use its best efforts to have the Official Committee of the Unsecured Creditors as well as any remaining key creditors join the settlement by June 15.

This agreement is a significant step towards FES ultimately emerging from bankruptcy and would settle a key issue in the FES bankruptcy process so that the creditors may focus their efforts on a restructuring plan.

2018 operating earnings guidance and the long-term growth rate we introduced in February includes the guarantees and assurances that we previously disclosed as well as other assumptions that fully capture the elements of this agreement. So we are affirming our 2018 operating earnings guidance of $2.25 to $2.55 per share as well as our long-term operating earnings growth projection of 68% (sic) [6% to 8%] through 2021.

I would also like to be very clear on this next point. We continue to have no plans for additional equity beyond the annual $100 million in investment and employee benefit plans through 2021. In addition, we expect this agreement in principle to be credit positive. We're also introducing a second quarter operating earnings guidance range of $0.47 to $0.57 per share.

Let's turn now to our business going forward as a fully regulated utility. In our transmission business, we continue to implement our Energizing the Future investment program. More than 600 projects either underway or in the pipeline for 2018 were on track to invest $1.1 billion in our transmission system this year, consistent with the capital plans we announced in February. One of these is a $45 million transmission project in McKean County, Pennsylvania that will help maintain service reliability following the retirement of generating plants in the region.

The project includes a new 230,000 volt transmission line that extends about 15 miles between existing substations in Bradford and Keating townships as well as new equipment to help reduce the frequency and duration of power outages. This project, which began late last year, is expected to be completed by mid-May ahead of a June 1, 2018 in-service deadline.

Another project nearing completion is the new 28-mile 138,000 volt transmission project in Erie and Sandusky counties in Ohio that is needed to maintain service reliability during periods of peak demand. We expect to energize the new line in late May.

FERC approved our settlement agreement for JCP&L's transmission rates in February. New rates were effective January 1 and are retroactive to June 1, 2017. This agreement also offers JCP&L the opportunity to file for forward-looking formula rates to be effective in 2020. The MAIT settlement filed in October remains pending at FERC, and we expect a ruling in the second quarter of 2018.

In our distribution business, the first quarter weather-adjusted load results closely matched our expectations, as Steve will discuss in more detail. During March, a series of nor'easters brought high winds and heavy wet snow that caused extensive damage to the eastern portion of our system. Collectively, these storms resulted in outages for millions of people in the Northeast. A total of 1.2 million FirstEnergy utility customers experienced outages as a result of these 3 storm events with our JCP&L and Met-Ed service territories hardest hit. In New Jersey alone, we replaced nearly 51 miles of wire, more than 750 poles and cleared trees at more than 5,400 locations during the restoration effort for the first 2 storms. Restoration for those storms involve more than 6,200 line workers, hazard responders and assessors, forestry crews, job dispatchers and electrical contractors.

We know being without power is difficult for our customers, and we are proud of the efforts by our employees, contractors and outside utility crews to efficiently and safely make repairs in challenging conditions. We are working with the utility commissions in both New Jersey and Pennsylvania to review our preparation and response to the outages.

While we are confident that we met our commitments, we'll work with the commissions to identify and implement any additional best practices that can help enhance the experience of our customers in these situations.

In total, our utilities spent more than $355 million on restoration efforts during the first quarter, including $250 million in New Jersey and $80 million in Pennsylvania. Approximately $230 million of the total was O&M, with all but $10 million being deferred for future recovery.

In Ohio, our application for a $450 million distribution platform modernization plan remains pending at the PUCO. We requested the commission's approval for this 3-year plan to redesign and modernize portions of our distribution system, which will help our Ohio utilities restore power faster, strengthen the system against adverse weather conditions and enhance system performance by allowing remote monitoring of real-time grid conditions.

Elsewhere, our plans include a filing midyear for our JCP&L customers under the New Jersey's infrastructure investment program, and we anticipate a rate case filing in Maryland during the second half of the year.

Now I'll turn it over to Steve, who joins us for the first time in his new role as Chief Financial Officer, for a review of the first quarter and other financial developments.

Good morning, everyone. It's my pleasure to join you today. Before we discuss first quarter results, I have a couple of housekeeping items to discuss with regard to our presentation of earnings.

First, substantially all of the operations that previously comprised our Competitive Energy Services Segment are now presented as discontinued operations in our other -- in our corporate and other segment for both 2018 and 2017 and are excluded from our operating earnings as a special item. This resulted from the deconsolidation of FES and FENOC, the completed sale of AE Supply's gas plants and the pending asset purchase agreements for the sale of Bath County hydroelectric and Bay shore plants.

The remaining competitive business activities, which were primarily related to AE Supply's Pleasants Plant, are included in the corporate and other for reporting purposes. As we will discuss later, there was some impact from Pleasants in our first quarter earnings, but we expect its results to be flat for the year.

Second, as we mentioned in February, all of our operating results and projections are being presented on a fully diluted basis. This includes showing the equity issued in January as fully converted or approximately 538 million shares and excluding the impacts of preferred dividends. We believe this is the best way to provide you with a comparative view of our performance.

Reconciliations for items, along with other detailed information about the quarter, are available in our consolidated report to the financial community, which is posted on our website.

As Chuck mentioned, our first quarter GAAP earnings of $2.55 per share included a $1.2 billion gain from the deconsolidation of FES, its subsidiaries and FENOC. These results compared to a first quarter 2017 GAAP earnings of $0.46 per share.

On an operating earnings basis, first quarter earnings were $0.67 per share compared to $0.52 in the first quarter of 2017 on a fully diluted basis and reflecting only the continuing operations of our Regulated Distribution, Regulated Transmission and Corporate/Other segments.

In the distribution segment, operating results increased $0.15 per share, primarily as the result of colder weather this year as compared to 2017, the impact of new rates that went into effect in Pennsylvania in late 2017 -- I'm sorry, in late January of 2017 as well as the Ohio DCR. Heating degree days were normal for the first quarter, but 17% higher than the same period of 2017. This drove a 5% increase in total distribution deliveries compared with the first quarter of 2017, including an 8% increase in residential sector and a 3% increase in commercial sales. On a weather-adjusted basis, first quarter residential deliveries were down less than 1% while commercial deliveries were slightly up.

Looking at industrial sales, the positive trend continued for the first quarter with growth of nearly 3% compared to that of last year driven by the shale gas and steel sectors. This marks the seventh consecutive quarterly increase in industrial sales.

In the transmission business, first quarter operating earnings increased as a result of the higher rate base in MAIT and ATSI due to our continued investment in the Energizing the Future program as well as higher revenues at JCP&L from the FERC settlement that Chuck mentioned earlier. At our Corporate and Other segment, first reflect the higher interest expense and the lower tax shield. This was partially offset by higher commodity margin at Pleasants, primarily due to higher wholesale prices in the first quarter of 2018. But as I mentioned earlier, we are expecting its earnings contribution to be neutral for the year as compared to 2017.

I will also note that we continue to expect our consolidated effective tax rate to be about 27% -- I'm sorry, 28% for the year.

Finally, we continue to receive questions about our approach to passing tax reform savings to customers. So I'll take a moment to discuss this process. Let me reiterate that for our guidance for 2018 does not include any benefit of taxes. On January 1, we began deferring these amounts as a regulatory liability until we work through the regulatory process in each of our jurisdictions. This is a complex issue that will be addressed uniquely in each regulatory jurisdiction.

We have already implemented the tax change for the DMR and DCR in Ohio, where we filed proactively to lower the rate to reflect the impact of tax reform, saving customers nearly $40 million. Our Ohio utilities also filed comments that base rate distribution rates are not impacted by the Tax Act changes because they are frozen through May of 2024.

In Pennsylvania, we estimate that the combined net annual effect of the tax rate will be about $116 million across our 4 utilities. Our companies filed comments presenting arguments that single issue ratemaking was not appropriate and provided support for implementing a reconcilable rider to be in effect 90 days of the final commission order.

The PUC issued an order making all rates, including rider rates, temporary as of March 15, 2018, for 6 months, potentially the earliest date that the PUC would go back for tax savings.

JCP&L reduced rates by $28.6 million on April 1, 2018, to reflect the tax rate change. These interim rates are subject to final BPU review, and the BPU is expected to make a decision regarding treatment of excess deferred taxes going forward by July 1.

JCP&L is seeking authority to continue to defer regulatory liability, the impact of tax reform during the BPU proceeding until the next base rate case.

In West Virginia, Mon Power and Potomac Edison will file a testimony by May 30 proposing the treatment of tax reform-related savings.

And in Maryland, while the estimated Tax Act impact would be approximately $7 million to $8 million annually for customers, Potomac Edison will file a base rate case in the third quarter of 2018 where the benefits of tax reform will be realized by customers through a lower rate increase than would be otherwise have been necessary.

On the transmission side, FERC issued a show cause order directing Mon Power, West Penn and Potomac Edison and 45 other utilities on stated rates to propose revisions to those rates effective March 21, 2018, to reflect the changes in the federal corporate tax rate. JCP&L was not included on the list of stated rate transmission utilities required to file, likely because the settlement at JCP&L's recent transmission rate case already took into account and addressed many tax impacts. ATSI, MAIT, TrAILCo and PATH will adjust rates as part of the normal annual true-up process. We will continue to work with the regulatory commissions in each of our jurisdictions to determine the appropriate approach for our customers.

Thank you for your time. Now let's take your questions.

(Operator Instructions) Our first question comes from the line of Steve Fleishman with Wolfe Research.

So just a couple of questions. On the -- with respect to the agreement, could you give us a sense of -- I think you said majority of creditors. Just any more specifics of percent of creditor support and any kind of known opposition that we should anticipate.

Well, I can't give you specifics on the percentages of total creditors. I can tell you this, 100% of the creditors that were in these ad hoc groups have signed on to both agreements. And so there was no opposition within the ad hoc groups and, as I said in my remarks, committed to work with us to get all the other signatories on by June 15.

Okay. Great. And then on the -- just on the overall, I know you mentioned your overall plan's still the same in terms of earnings per share growth and equity. Maybe just a little more color on kind of how your credit metrics look. And you said the credit agencies should be positive. Any more color on their reaction to this?

Well, we'll let them speak for themselves, Steve. But I would tell you this, we've reviewed the settlement with both of them, which led to my comments about my belief that it will be credit positive. The metrics themselves are going to evolve as we move through this process, but I think that we expect to be well within the guidelines of both -- of all the major rating agencies.

Our next question comes from the line of Julien Dumoulin-Smith with Bank of America.

Yes. So perhaps to follow up on Steve's question a little bit more precisely, can you comment a little bit on the credit-positive nature of this with respect to where exactly pro forma for the settlement your FFO-to-debt ends up through the forecast period and how you see this changing versus your prior expectations? It would seem that largely, the tax note and the $225 million here would be the 2 key items to watch in terms of the evolution, but let me know your thoughts.

Julien, this is Jim. Let me jump in here. When we get out into our planning period post-emergence, we see our credit metrics being solidly in the 12% to 13% range, which is well above S&P and the Moody's threshold. So we feel very good about that. On the second point, yes, you're right, we have the $225 million plus the $628 million tax note that we've talked about, but that was well within the parameters of our planning period. As you see, the tax note, $628 million, that's not due until December 31, 2022, which is essentially a financing, which will be at the risk-free treasury rate that's prevailing at the time of emergence, so that will have what I'd say a minimal impact on our FFO. So all in all, it's well within the guidelines of what our plan was, and we feel still very confident that we're going to be within that range.

Got it. Excellent. And then just with respect to Ohio, New Jersey, you alluded to upcoming infrastructure filings, et cetera. How do you feel about being within the range -- or the distribution CapEx range you talked about earlier? And if you were to get these filings, where would that put you, just to kind of make sure we're in the same ZIP code?

If we would get what's in Ohio and New Jersey, I would suggest that, that would probably put us in the upper end.

Our next question comes from the line of Jonathan Arnold with Deutsche Bank.

Just a quick one first. This date of June 15, is there any particular significance to that as part of the bankruptcy process? Or is that just a date that you're targeting?

No, it's just a target date. There's no significancy. But clearly, this agreement in principle is a major step forward. And hopefully, we can get the rest of the creditors onto it also.

But does the agreement hold if you don't achieve that by June 15?

Yes.

Okay. So there's no particular time frame whereby you'd have to resolve to keep this agreement intact? Or is there...

No.

Okay. And then just separately, I wanted to revisit the tax slide. You're saying you haven't included anything in guidance for -- as a benefit from tax reform. Am I right in what you then said that you do have the benefit of the lower tax rate in Ohio where you have the rate freeze, but you consider that to be part of the freeze, and therefore, it's not a benefit per se. So you aren't deferring that piece? Or I just want to make sure I understand that right.

No, Jonathan. We're deferring everything at this point. So we are also deferring that in Ohio. And as Steve and Chuck have mentioned earlier, we're not going to make any adjustments to those deferrals until we have what I'd say final authorization from all the commissions.

So guidance and first quarter earnings then also -- both of those defer the Ohio piece as well as everything else?

That's correct.

And our next question comes from the line of Greg Gordon with Evercore ISI.

So just a couple of follow-ups, pretty thorough questions so far. The $810 million in pension and postretirement and other costs, that number, as of your most recent update, was closer to $1 billion. I just want to make sure that, that's lower as a function in part of the pension funding exercise you guys did with the -- part of the equity raise earlier this year? Or are there other aspects of that change that are not associated with that?

Greg, I think we've always been pretty consistent that the pension and other post-employment benefits would be in about the $800 million range. And that's made up of the pension, executive deferred comp, banked vacation as well as a little bit of our long-term incentive program. I think probably -- we also incorporated some guarantees in there, which was about $140 million. So that gets you right to your $1 billion range.

Okay. My bad. Sorry about that. Second question, as I look at the terms of this deal, new money to the FES creditors is about $225 million. You've got the tax note, you're transferring Pleasants. So other than the opportunity for you guys to participate in the value of the bonds, if they agree ultimately to more than $0.60 on the dollar, this is sort of definitively a clean break with FES with you having some optionality if they get recovery above $0.60. Is that a fair summary?

I think that's a very fair summary. I think you've got it figured out.

And our next question comes from the line of Paul Patterson with Glenrock Associates.

Greg sort of asked my question. I guess, just to make sure, so after the emergence of bankruptcy, do you expect any ongoing support in terms of employee benefits or anything else to be going to -- for FirstEnergy Corp. to be providing any assistance or cash payments to the generation company?

No. The entire arrangement will be done through this settlement process with the creditors, and that will be it. We deconsolidated the books on the filing of FES, and we don't intend to provide any more support to that part of the business other than we've agreed to provide some shared services support through the restructuring process, some governmental affairs support through the restructuring process. Those all will be reimbursed by FES.

And our next question comes from the line of Praful Mehta with Citigroup.

Just want to clarify, on earnings, the 6% to 8% earnings growth, that's still off of the earnings excluding the DMR. So in like 2018, 2 15, is that right?

Correct.

Got you. And then secondly, in terms of parent debt. I saw that the parent debt came down a little bit. I think $6.6 billion, it was at 7 -- $7.2 billion last release. Just wanted to check, is there anything specific that happened at the parent level in terms of deleveraging?

No. There isn't, Praful. I know that, at the parent level, when we issued the equity, we took out some of the term notes, but that should have been the extent of it. Our short-term debt probably went up in the range of about $1 billion, maybe a little more than that, and that's associated with the $500 million pension contribution we made. Also, the revolving credit facility was drawn down by $500 million because FES drew that down. And then we had about $300-and-some million of storm cost. But I would say that's what the primary changes are in any type of our consolidated parent debt is.

Got you. And that level is expected to remain at this level? Or is there any plan in the near term to kind of pay it down or borrow further as needed?

I would say over the planning period, that's going to stay about in that range.

And our next question comes from the line of Stephen Byrd with Morgan Stanley.

Wanted to just touch base on parent level costs and just as you think about -- I know you've been working on cutting costs. But is there any further potential as we think about your cost structure at the parent or otherwise, just -- we should be thinking about in terms of initiatives or potential further cuts there?

Well, Stephen, I think the way to think about it, we started the process of what we call FE Tomorrow about a year ago. We have been already, over the last year, implementing changes to the parent in anticipation of this restructuring process. We are not going to disclose dollar for dollar what we're doing here and there. I don't think that, that's in our best interest to try to do that. I can just tell you this, we are committed to resizing our corporate center to match the operations that we're going to have in a manner that makes sense, that we can get full recovery of those costs as we move forward as a regulated business.

Understood. And Chuck, just at a high level, you're generally encouraged by sort of the progress that you've been making in terms of that cost cutting effort?

Yes. I'm very encouraged. And I think we set some targets that I'm confident we're going to meet, and I'm also confident we're going to exceed those targets. You'll see the impact on it as we deliver on the growth rates that we've projected.

That's great. And then shifting gears, just on the tax note, the $628 million, I know that's basically sized to equal the cash tax benefit that you're going to realize. But I guess, is it fair to say, I guess, your view is you would realize those benefits before the note is due in payables? In other words, you'll benefit from that cash flow and then ultimately you'll need to pay that note off. But it's really designed to sync up, ultimately, but I would guess maybe some of that cash might come to FE before the maturity of the note. Is that fair? Or how should we think about that?

Yes. Stephen, that's correct. We could receive those funds prior to that. And the note also allows us to pay that off early without any penalty if we so decided.

Okay. Perfect. And then just lastly, just on one element of the agreement in principle. I think there was provision where FirstEnergy could share in recoveries. I was thinking about to the extent that there is federal support for baseload generation, would those kinds of support payments be something that potentially FE could be sharing in? Or would that be excluded?

I would say that, that's potentially something we could share in. But I just want to be really clear. We're highly motivated to get support for those generating assets because it would be a mistake for our country for them to close. The communities and employees are -- have the biggest concern there. As of a couple of weeks ago, we have no remaining commercial interest in these generating facilities other than potentially what you just referred to and the settlement with creditors. I'm going to keep fighting for support for those plants because it's the right thing to do. If it gets to the point where it exceeds the threshold that we've got in this agreement with creditors, then yes, we would share some of that, but that's not why we're doing it.

And our next question comes from the line of Michael Lapides with Goldman Sachs.

I know it's been a little bit of a long road, but you made a lot of progress, so kudos. One question about the -- follow-up on the nuclear plants, though. Does this mean that the creditor group -- if the plants actually retire as announced, then FE Corp. doesn't maintain any of the liability associated with the retirement cost, meaning the decommissioning cost, the dry cask storage and that, that would all fall to the new owners of the plants?

That's correct.

Okay. I appreciate that. One other thing, just looking -- and this is on the distribution business, and this is more of a housekeeping item. It looked like O&M was up a good bit year-over-year. I don't know if I'm misreading that. Or is that all stuff that just gets passed through in revenues one-for-one as well? Just wanted to see and maybe check that.

Michael, this is Jason Lisowski, Chief Accounting Officer. Actually, the O&M cost is actually a benefit year-over-year. There was about a $0.05 benefit, and a lot of that is through the pension OPEB cost being reduced because of the higher asset return and the contribution made back in January.

Got it. I may have misread that. I'll follow up with you guys offline.

It's nice to get a distribution question.

And our next question comes from the line of Charles Fishman with Morningstar.

Chuck, not being the expert in bankruptcy that you have reluctantly become, Exhibit A in the term sheet that was filed in the 8-K this morning, I just want to make sure my reading of that is correct. All that does is memorialize the Mansfield leaseholders as unsecured creditors of FES to the tune of, what, $787 million, no obligation there to FE. Correct?

Correct.

And our next question comes from the line of Shar Pourreza with Guggenheim.

Just let me ask you -- most of my questions were answered. But on the tax note, there was -- in one of the terms of the draft, there was some language that the tax note can be somewhat mitigated if there is a sale or partial sale of the fossil or nuclear assets. Does that sort of potentially also relate -- is there a process in place whether the decommissioning activities could be up for sale? And how does that sort of work with the tax note?

Yes. What that means from that tax note is if they were to, say, sell the plant or deactivate that and FE pays them through the intercompany tax sharing agreement and, in turn, our work with stock deduction is reduced, that's really what that's intended to mitigate.

Okay. Got it. So it's not related to a potential sale of the decommissioning activities as you shut the plants down?

No.

Is there a process in place to sell the decommissioning activities?

You'd have to talk to the creditors and FES about that one.

Okay. Great. And then, Chuck, let me ask you a distribution question. So as you sort of think about tax reform, and I know some of the stuff has been deferred, but as you sort of think about like the accumulated deferred income tax balance that you guys have, have you guys sort of thought about or have you broken out how much of that is sort of protected versus unprotected? And as you sort of think about the unprotected portion, is there an opportunity to sort of credit that back sooner than later and potentially look at higher rate base opportunities?

I'd be lying to you if I said I was an expert in that field, which I'm not. I know we had a question on that before. The unprotected piece is relatively insignificant at this point, so we haven't focused much attention on that at this point.

(Operator Instructions) Our next question comes from the line of Angie Storozynski with Macquarie Capital.

So I have a question on this 6% to 8% EPS CAGR, so that was issued before. You knew how much money you will need to really settle with FES creditors, so now we have a sense. So can you give me an idea if there's any potential offset to those incremental costs associated with the settlement, and hence, I'm roughly in the same place within that range? And if not, what is basically driving the difference between the 6% to 8% in that range?

So, Angie, when we gave you that 6% to 8% in February, we were already in the middle of discussions with creditors and built into that our assumptions about what the cost to reach an agreement might be. So it's already included in the 6% to 8% and there's no need to adjust for it at this time.

So the delta -- so the 6% to 8% is just purely a function of O&M attrition fees and CapEx or maybe low growth as well?

There is no delta to the 6% to 8%.

No. No. I understand. What I'm trying to say is what could give me an 8% EPS CAGR versus a 6% EPS CAGR? What's the biggest driver here?

More investment such as the distribution platform modernization in Ohio or the infrastructure investment in New Jersey. More investment would be what would drive us towards the top end.

And our next question comes from the line of Michael Lapides with Goldman Sachs.

Actually, Chuck, I'm going to make your day. I'm going to ask you more questions about the distribution business. Can we go to the appendix, please, the slide, I think it's 23, where you talked a little bit about Pennsylvania and the slide before that when you talked about Ohio. In Pennsylvania, you've got 2 utilities that are earning healthy ROEs and 2 utilities that look like they're under-earning. What's the trajectory and plan to fix the ones that are under-earning?

Yes. I'd say from our standpoint, Michael, what we always do is we look at what our projected capital investments are going to be as well as what load growth or degradation will be, and then we'll sit back and make a decision whether we should go in for a filing. You're right, we've got a couple of utilities that have a slightly higher ROEs that doesn't allow us to have the DISC recovery at this point in time. But there is some additional expenditures that are starting to flow through there that's going to bring them back down within the -- I think, below the 9.5% range or whatever to that. But I would say, we universally look at all of our distribution companies, what our plan spend is, what our expected revenues and returns are, and then we make a decision on whether we should go in for a rate proceeding. And I think you can see that magnified in what we're going to do in Maryland. We're planning on making a filing at the latter part of this year, and there's -- that's the way we approach it. But just -- that's just slightly below -- we don't make a decision to go in immediately and get into what I'd say rate fatigue. We strategically look at what is the optimal timing on when to make those filings.

Got it. And then a more -- maybe more strategic kind of question. We've had 3 or 4 years in this industry among regulated companies, including an announcement made today of M&A occurring where companies are able to cut costs via M&A. Those costs eventually flow back to customers via the rate case process somewhere down the road, makes companies more efficient. Just curious, once you get FES result, and it looks like it's happening sooner rather than later, how you think about the landscape for M&A and what FirstEnergy's role in that landscape is, if any.

So we're a product of 3 of those types of events. And I'm proud to say that when you benchmark our O&M costs across all of our utilities, they benchmark very well against our competition. I would think that the synergies of those transactions have helped us achieve that. The end result of that is that we have pretty much lower the lowest rates in the states that we serve. So we've given the benefit of those transactions to our customers. I'm a little tentative when you think about M&A type of things today because of the premium cost and the high cost to achieve from a regulatory perspective makes it difficult to deliver dividends to customers in the short term. I think we've positioned ourselves now, with 6 million customers across 5 states. That 6% to 8% growth on top of an appropriate dividend policy is going to be a good story for our investors for a long time to come.

Okay. Well, thank you for your questions and your time and thank you as always for your support. I think this was an important call for us as we move forward, and we'll talk to you next quarter.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.