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FirstEnergy Corp. (NYSE:FE)

2014 Earnings Guidance and Strategic Outlook Conference

January 22, 2014, 08:30 AM ET

Executives

Irene Prezelj - Vice President, Investor Relations

Tony Alexander - President and Chief Executive Officer

Jim Pearson - Senior Vice President and Chief Financial Officer

Analysts

Kit Konolige - BGC

Paul Patterson - Glenrock Associates

Julien Dumoulin-Smith - UBS

Steve Fleishman - Wolfe

Jonathan Arnold - Deutsche Bank

Dan Eggers - Credit Suisse

Paul Ridzon - KeyBanc Capital Markets

Operator

Greetings and welcome to the FirstEnergy Corp. 2014 Earnings Guidance and Strategic Outlook Conference Call. (Operator Instructions)

I would now like to turn the conference over to your host Irene Prezelj, Vice President, Investor Relations. Thank you, Ms. Prezelj, you may begin.

Irene Prezelj

Thank you, Calvin, and good morning, everyone. Leading the call today are Tony Alexander, President and Chief Executive Officer; and Jim Pearson, Senior Vice President and Chief Financial Officer. We have 45 minutes scheduled for today's call. Tony will open with a strategic update and then turn it over to Jim for details on our 2014 operating earnings guidance. At the conclusion of their remarks, we will take questions.

After the market closed yesterday, we issued a letter to the investment community, which is available on our website in the Investors section under News and Market Information. That letter contains additional details about some of the items we will discuss.

Before we begin, I'd like to remind everyone that the matters we will discuss contain forward-looking statements within the meaning of the Safe Harbor provisions of the 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 and estimates that are subject to various risks and uncertainties. A number of factors could cause the actual results or outcomes to differ from those indicated by our forward-looking statements.

Please read the Safe Harbor statement in the letter to the investment community for a full discussion of the factors that may cause results to differ from management's projections, forecasts and expectations and for a reconciliation of operating earnings and other non-GAAP measures such as adjusted EBITDA and FFO to the most comparable GAAP financial measures.

I will now turn the call over to Tony.

Tony Alexander

Thanks, Irene. Good morning, everyone, and thank you for joining us today. As we announced yesterday afternoon, our Board of Directors declared a quarterly dividend of $0.36 per share payable on March 1, 2014. Following a thorough review, the Board ultimately determined that aligning the dividend with our regulated operations will provide the best path forward for FirstEnergy. While this was a difficult decision, the Board believes this action will reduce uncertainty and create a dividend environment that is more sustainable and predictable.

The review included a longer-term perspective on the sustainability of the dividend, aligning the dividend with our expected business mix and considered the capital needs of the regulated operations of the company going forward. The Board also considered the economic conditions, competitive market realities and our overall requirements to continue to meet increasingly and more costly regulatory and environmental mandates. We expect the regulated utility and transmission businesses to fully support an annual dividend of $1.44 per share going forward.

As you know, we have suffered from a multiyear economic downturn and it has directly affected us in many ways, including essentially no load growth at our utilities and declining energy prices. In addition, PJM's capacity auctions, which are intended to provide support for competitive generators, do not and instead have delivered unpredictable and inadequate results. We also experienced significant storm activity in both 2011 and 2012, pressuring cash and accumulating more than $1 billion in storm-related expenditures that were not yet recovering.

To address these challenges, we've taken significant actions across the entire company, including aggressive O&M reductions, deactivation of more than 5,000 megawatts of generation within PJM since 2012, substantial decreases in our spending for environmental compliance and maintenance capital of our generating facilities and the planned sale of certain generating assets.

These actions however have not offset the impact to our business of the continuing recession in our service area, depressed power prices and storm expenditures. While the recession and depressed power prices are not new, the expected recovery has been long delayed. And while the prior dividend was supported by regulated utility and transmission earnings, our expectation was that we would grow out of the higher payout ratio, which has not materialized.

Our plan, which includes setting our dividend at an appropriate level, given the mix of our assets and operations, additional annual equity issuances through our stock investment and other employee benefit plans, as we've talked about in the past, and maintaining prudent levels of debt, consistent with investment-grade ratings for a more regulated profile, is intended to strengthen FirstEnergy's balance sheet and credit metrics and de-risk the business overall. And with a stronger financial profile, we should be in a better position to pursue growth opportunities within our regulated operations.

Effectively, this plan positions FirstEnergy for the future. We've already outlined the growth opportunities we intend to pursue in our transmission business over the next several years, which will obviously support continued reliability and enhanced service to our customers. In addition, we also intend to file rate increase applications in West Virginia and Pennsylvania this year, again resetting our expectations in those businesses and our opportunities for growth going forward.

While we'll take a couple of years to work through the changes in our business, we expect they will position the company over time, take advantage of the investment opportunities within the regulated service area of the company and provide a base for more predictable growth with less overall risk.

We also plan to rigorously focus on capital deployment over the next several years, as we reposition the balance sheet. This may involve slowing down or shifting capital investments between segments. For example, I would expect that our transmission expenditures over the next four years will be at the lower end of the range we provided in November at about $4.2 billion in total. But this should provide the added flexibility necessary to make each and every dollar we spend effectively used.

I'd also like to be clear about our competitive operations. This is a valuable business with more than 13,000 megawatts of high-performing, efficient and cost-effective generating assets and more than 2.7 million retail customers. Even though current competitive market conditions are challenging, we have taken actions to reshape this business and to mitigate downside exposure, while preserving the upside as market fundamentals improve.

We all know the leverage there is in energy prices. So our plans include allocating resources towards more maintenance capital to make the existing fleet more efficient, but not larger and only spending that capital if it is justified by fundamental upward shifts in market dynamics.

We've always said the diversity of our assets is one of our greatest strengths and this diversity allows us to reposition the company. Since our primary focus going forward will be on regulated growth opportunities, we expect any additional free cash from our competitive operations will be used to further support that growth or further strengthen the balance sheet.

Let me now turn the discussion over to Jim to provide in more detail our strategy as well as our 2014 operating earnings guidance as it relates to each of our businesses. Jim?

Jim Pearson

Thanks, Tony, and good morning, everyone. Today we are announcing a 2014 operating earnings guidance range of $2.45 to $2.85 per share. We are also providing additional transparency in our businesses by providing key earnings drivers for each of our segments. This provides a solid baseline from which investors can follow the company going forward.

Our earnings and asset mix shifts as FirstEnergy's primary focus going forward will be regulated growth opportunities with more than 90% of our expected earnings from regulated operations beginning in 2014. And importantly, once we complete our MATS compliance and nuclear upgrades, we expect more than 85% of our going-forward CapEx requirements to be focused on our regulated operations.

Let me start with our Regulated Distribution segment, where we are forecasting 2014 operating earnings guidance of $1.85 to $2.05 per share. We have a number of regulatory items that should be clarified in the near term, including the current New Jersey rate case and associated 2011 and 2012 storm cost recovery. When you look at all storms over those two years, we have more than $1 billion in expenditures that we are not yet recovering, primarily in New Jersey. The ongoing rate and storm proceedings are the primary reason for the wide range of our guidance.

While we historically have used a $0.30 range for guidance, this year we have a $0.40 range with the additional $0.10 being applied to the regulated distribution segment. Once we have clarity with respect to the Jersey Central P&L proceedings, we intend to narrow the range. I'll also note here that our current forecast assumes that earnings at JC P&L are neutral to 2013 levels.

The primary drivers for our year-over-year earnings projection are increased distribution revenues and regulated generation operating margin, which includes the West Virginia asset transfer completed last October, offset by increases in O&M, pension, depreciation and net financing costs. We have a fairly conservative view of demand growth over the next several years, but are cautiously optimistic we are seeing the early indications of a sustained recovery.

For 2014, our load growth is expected to be six-tenths of 1% with 148.8 million megawatt-hours versus 147.9 million megawatt-hours delivered in 2013, with the majority of the forecasted increase in the industrial sector. The size of growth in 2013 industrial sales are encouraging. Shale gas activity in our region has resulted in 210 megawatts of new industrial demand already online and an additional 430 megawatts of planned expansion at customer facilities. These projects alone are expected to result in nearly 4% industrial growth over the next two years.

In addition, we see a robust pipeline of midstream projects with opportunities for an additional 200 megawatts of growth through 2018. We are also seeing housing starts pick up throughout the service area and some improvement in commercial starts. We are also looking for opportunities to modernize and improve the efficiency of our utility distribution system in order to continue to provide solid reliability to our customers. These efforts would produce additional rate base growth and associated modest earnings growth from our utilities going forward.

For example, in West Virginia, we have a rate filing plan for this April. And in Pennsylvania, we are seeking approval to accelerate the smart meter deployment at Penn Power to begin later this year. And we also expect to file rate cases later this year in Pennsylvania. Over the next several years and into the future as we focus on regulated operations, I would expect that the company will be far more active in distribution rate filings than it has in the past.

Now turning to our transmission business, as we outlined for you at the EEI Financial Conference in November, expanding transmission investments will provide a significant portion of our future growth. We also outlined a range of expected transmission investments over the 2014 through 2017 period of between $4.2 billion and $4.6 billion. We currently expect to be at the lower end of that range with $1.35 billion beginning in 2014. That's an increase of $850 million versus our 2013 capital expenditures. The majority of our 2014 investments are planned in ATSI and includes the $500 million incremental spending we discussed at EEI.

We continue to expect to achieve a targeted average annual earnings growth rate of 20% over the next four years at our formula rate companies, ATSI and TrAILCo. And as we disclosed earlier, the transmission opportunity within the FirstEnergy footprint exceeds $7 billion. So this is a continuing platform for growth beyond that period.

Yesterday's materials also include a more detailed breakdown of earning drivers for the transmission segment on Page 9 of the materials. We expect the transmission segment's earnings to modestly grow over the next two years and then accelerate as the investments and costs are fully recognized in rates. We expect to fund this expansion with a combination of debt, equity issuances through the stock investment and the employee benefit plans and $320 million annually in cash preserved as a result of our dividend action. This should provide sufficient capacity to not only invest in these growth initiatives, but also support significant balance sheet improvement over the period.

Combined, our regulated utility and transmission 2014 operating earnings are forecasted to be between $2.37 and $2.63 per share. We expect a smoother level of consistent earnings growth than we would have seen otherwise due to the opportunities for additional utility investments I mentioned earlier, as well as from establishing a new baseline for growth as distribution rates are reset. The midpoint of our 2014 regulated guidance range implies a dividend payout ratio of 58% of our regulated earning.

Moving now to our competitive business, we have taken deliberate actions to change the character of the fleet and to stabilize this business for the future. These actions reduce cost while putting the fleet in a much stronger position to manage through the current power market cycle. We believe the long-term value of the competitive fleet has not only been preserved, but enhanced and better positioned for the future. We reduced the size of the fleet and changed the mix of assets. And while it's about the same size as it was before the Allegheny merger, it's a much stronger platform of units, more environmentally sound and efficient overall. With the closure of the Hatfield and Mitchell power plants, the completion of the Harrison and Pleasants' asset transaction, the planned sale of certain hydro assets and the closure of RMR units, the competitive fleet will be just over 13,000 megawatts.

As a result, we've reset our annual retail sales target to about 100 million megawatt-hours, which fits into our overall strategy to sell at retail about 25% more than our own fleet producers. We also significantly reduced our capital expenditures. On the competitive side, our projected MATS spend is now $240 million. In total, we produced our projected capital spend by more than $1 billion. The majority of the remaining capital investments over the next several years will be focused on projects to extend the life of our nuclear assets with new steam generators at Davis-Besse this year and new steam generators and reactor head at Beaver Valley Unit Two in 2017.

Once these are behind us, we expect ongoing annual capital expenditures to be in the $350 million to $450 million range, about $200 million to $300 million less per year than our current plan and about $100 million less than our annual depreciation.

2014 operating guidance for the competitive segment is $0.35 to $0.49 per share or $800 million to $850 million in adjusted EBITDA. We expect adjusted EBITDA to range between $950 million and $1.05 billion in 2015. And over the 2014 through 2016 period, we expect operating earnings from competitive operations at a minimum to cover our holding company cost and to be cash flow positive as well.

One final note on our competitive operations. Last week, we received FERC approval for the sale of certain hydro assets. So we anticipate that transaction to close in the near term. In terms of some of the supporting details, yesterday's materials include disclosure related to 2015 and 2016 committed sales. In addition, we've also provided a high-level listing of earnings drivers for both 2015 and 2016 for all three business segments.

Before I close, let me touch briefly on our financial strategy. We'll concentrate on those expenditures that are an absolute necessity as we enter a capital-intensive period over the next several years with a rigorous focus on cash flows. We'll also continue to focus on investment-grade metrics at our utility, transmission and competitive businesses.

Last year, we made significant improvements to the balance sheet of our business units, particularly at our utilities and competitive operations. And we'll work to improve the credit metrics at FirstEnergy by reducing debt as we are able to over time.

Finally, we expect to release 2013 results on February 25th. We are narrowing our 2013 operating earnings guidance range to $2.95 to $3.05 per share from $2.90 per share to $3.10 per share. The midpoint of $3 per share is the starting point included in a detailed operating guidance information provided in yesterday's letter to the investment community.

In closing, this plan provides us with financial flexibility and reduces our overall risk profile. It places us in a much stronger position consistent with our goal to provide long-term value and growth for our investors.

Okay. We'll now open up the line for calls.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today is coming from Kit Konolige from BGC. Please proceed with your question.

Kit Konolige - BGC

A couple of questions, little bit different areas. First of all, in thinking about the competitive operations, if I understood you correctly, you've indicated that we should not expect growth in terms of their being, say, more megawatts that you control in the future and you're cutting back on CapEx. Is there any thinking about strategic realignment of the competitive operations, say, selling or closing down other power plants?

Tony Alexander

Kit, we continue and will always continue to look at various options that would work or would better position the entity going forward. Right now, we're comfortable with the size of the fleet we have. We think it's very cost-effective fleet going forward, but we'll see how market dynamics and market conditions react over the timeframe and then we'll make appropriate decisions accordingly.

Kit Konolige - BGC

Very good. And separate area, I guess this would be for Jim. Regarding segment earnings guidance, it looks to me, Jim, like there is a big part of that decline in '14 guidance versus '13 has to do with the regulated distribution business. Can you kind of break down for us a little bit, what the drivers are going on there and maybe talk a little bit about what the achieved ROE is that you're seeing in 2014?

Jim Pearson

Okay. Kit, we're slightly down in the distribution segment year-over-year. We typically don't speak directly on what our ROE expectations are at each of the levels. What I would say though is we are targeting to drive towards the allowed returns within all of our distribution businesses. The primary drivers are our distribution revenue is up $0.06. We are assuming about 0.6% increase in load growth. A big portion of that is on the industrial side. Our regulated operating margin is up $0.03. And our effective tax rate is up $0.03.

The offsets there would be our distribution expense is up a couple of cents and our pension and OPEB is $0.05 drag to those earnings, along with depreciation, general taxes and some net financing costs. So that's what's driving that segment, Kit.

Tony Alexander

Kit, I think it's important to recognize we haven't had rate cases for quite some time now. And we've been a part of - in recognition of what's been happening in from a customer standpoint in terms of the depressed economic conditions we've tried our best to hold off. As we move more towards regulation in terms of - we also anticipate having more rate applications. For example, some time this year, going into '15 or '16, the Pennsylvania and West Virginia decisions will be made. The New Jersey decision will be made. Those will all set baselines and new baselines for going forward.

So as we transition more towards a rate case model in terms of improving service to customers and getting them reset at new baselines, there will be a lot of things changing. For example, over the last several years and in part because of the major emphasis on reliability that we've had and because of our desire not to have interim rate cases, we have shifted a lot of our capital, particularly our vegetation management to a lot of our expense to capital, I should say, particularly our vegetation management. We are now about closed in many areas. We're not done yet, but we are about closed in many areas. That doesn't get rid of veg management, but it does move it from capital to expense. And that will happen naturally as we're moving towards these rate case applications in the various jurisdictions that we will have.

Kit Konolige - BGC

Just a final question to follow on that. Can you address at all what we should expect the growth rate to be in earnings in the distribution segment? Obviously you've addressed that in transmission.

Tony Alexander

That's going to depend primarily on our effectiveness as we move through the rate case process. And I think at this point, it's a little early to begin to try to address that.

Operator

Our next question is coming from Paul Patterson from Glenrock Associates. Please proceed with your question.

Paul Patterson - Glenrock Associates

I want you guys to maybe elaborate a little more on pension and OPEB. Is that a fixed income impact?

Jim Pearson

Yes, Paul. There're surely two items driving that. It's split about 50-50 between pensions and OPEB. And let me start with OPEB. We had some prior plan amendments that were credit to expense and those are amortizing probably over the next four to five years. And we are seeing a decrease there associated with those prior plan amendments.

The other portion deals with the pension. And that relates to -- our plan was heavily weighted in fixed income in 2013. So we got the benefit of the change in the discount rate, moving from 4.25% up to about 5%. So we got a significant benefit on the reduction on the liability. Now on the asset side, our actuarial assumption was a return of 7.75% on those assets. And the actual results were lower than that. So our asset base where we're applying our expected return in '14 is lower. So that drove a couple of cents there.

Paul Patterson - Glenrock Associates

And this is because you got a lot of fixed income exposure?

Jim Pearson

That's correct.

Paul Patterson - Glenrock Associates

Okay, and then nuclear trust funds and stuff, we don't have the same impact, is that right?

Jim Pearson

On nuclear trust fund, we do have them in fixed income, but we would expect that our earnings on those funds would be similar in '14 as they were in '13. We may have less gains when we reposition those funds or reallocate those assets during the year.

Paul Patterson - Glenrock Associates

With respect to the dividend payout policy, 58% doesn't sound particularly aggressive. Is that because the allocation of the corporate overhead, is that how we should think about them? How should we think about the payout going forward and just sort of what the dividend policy will be going forward I guess? I assume it's off of a regulated business if I understand correctly?

Tony Alexander

Paul, the Board did not take action on a specific dividend policy. What you're seeing is kind of the result essentially of applying the announced dividend to the expected operating earnings of that unit. There we're looking at dividend policy on how we'll address dividends going forward as they typically do on a quarterly basis, taking into account all of the information that we have at the time. I think at this point, the Board and management is far more comfortable with a dividend level that is very reflective of our operating opportunities inside the regulated platform. And then as we reposition that platform through additional investments through rate cases and then through other means to improve its operation and earnings position hopefully with some additional growth in our service territory over time, I think the Board will then be looking more closely at dividend policy and how best to align those together.

Operator

Our next question is coming from Julien Dumoulin-Smith from UBS. Please proceed with your question.

Julien Dumoulin-Smith - UBS

First quick question, you talk about generating cash on the competitive side. Can you talk about the support of the business, whether you need to continue this supported in the context of this new dividend policy?

Tony Alexander

Why would we not support a business that provides $800 billion in EBITDA and a very strong upside as markets improve. It's a strong business with good assets, lots of good people and 2.7 million customers.

Julien Dumoulin-Smith - UBS

Perhaps I'll be a little clear, if you will. Is there a need to provide cash injection into the business through the course of the nuclear upgrades that you've talked about or can the business, given the EBITDA profile, support itself through the period of this right between MATS and nuclear?

Jim Pearson

I don't foresee us having to make any cash injections into the competitive business. So said another way, their cash flow should be sufficient enough to fund the CapEx that we expect over the next three years.

Julien Dumoulin-Smith - UBS

Right. I know you provided at least some indicative drivers that year-on-year into '15 and '16, can you talk just a little bit about how to think about retail in the context of the rising and the declining capacity revenues/expense and how to think about gearing ourselves in terms of what that actually means from an EBITDA and EPS perspective, particularly as we look at '16?

Tony Alexander

From '15 standpoint, you would expect that our revenues are going to be up associated with the capacity. You'll see in '16 there will be a decline there as the second half of '16 the capacity revenues roll off there. Is that what you're getting at?

Julien Dumoulin-Smith - UBS

Yeah. And how to think about that in the context of declining capacity expense? How much of the roll-off are we actually going to see in 2016 versus what you would typically think of as RPM roll off? Is there a good way to express that at all? You guys have described this retail policy historically encounter counter-cyclical obviously to RPM and energy trends. Is that a good way to think about it?

Jim Pearson

Well, I'd say as we get out into '16, we still have a fairly large amount of our book that is open when you compare that to '15. So I think as we continue to close our position, that'll become a little more clear. But I don't know if there's any more transparency that we could give to you other than what we have at this point.

Julien Dumoulin-Smith - UBS

Got you. Lastly, on O&M, you talk about improvements on the competitive segment at least directionally again over the next couple of years, specifically '16. Any sense on how significant that should be, or you're thinking about at least initially?

Tony Alexander

Well, we're seeing some O&M improvements on that side of the house primarily related to the closures of the Hatfield and the Mitchell plants. I would expect that those O&M dollars would remain fairly flat over the next several years. The probable fluctuation would be number of outages we have.

Operator

Our next question today is coming from Steve Fleishman from Wolfe. Please proceed with your question.

Steve Fleishman - Wolfe

Just a clarification, in the past, you've talked about $100 million of (inaudible) equity I think per year. Is that still the right range?

Jim Pearson

I think it'll be probably more in the range of about $80 million right now, Steve.

Steve Fleishman - Wolfe

Okay. And that should be the only new equity under this new plan?

Jim Pearson

That's all we are anticipating, yes.

Steve Fleishman - Wolfe

Okay. And can you give us a rough idea of kind of the balance sheet target improvements that you see over the period? I mean whatever metrics you are kind of targeting at?

Jim Pearson

What we look at, Steve, is our debt to total capitalization and our FFO to debt. Those are the two primary ones we see. I would expect over the next several years that we could see an improvement in our debt to total capitalization in the 2% to 3% range. And we would expect that our FFO to total debt over this period would probably move into about the 15% range.

Steve Fleishman - Wolfe

Okay. And then one last strategic question. Just given the focus on the regulated side and growth there and I guess on the competitive side, trying to kind of stay there, but keep it contained, if you're looking at any kind of strategic type transactions? Are you going to make sure your competitive business doesn't grow further? Is the real goal to kind of making it small as a percent of the whole?

Tony Alexander

Steve, this is Tony. I don't know that I've even thought through anything like that. Again, I'm not going to speculate on what's out there or what could be available or how it could reposition the company. I think you have to look at that over time. As we see the company today and the opportunities going forward, we believe that focusing our efforts primarily on regulated operations is the best thing for the company.

Operator

Our next question today is coming from Jonathan Arnold from Deutsche Bank. Please proceed with your question.

Jonathan Arnold - Deutsche Bank

You talked about the debt to total cap improving 2 percentage points to 3 percentage points over, I guess, a period of a year. What's the current amount of leverage on the competitive business? And then what's the current number of the parent? Could you give us an update on that?

Jim Pearson

Yeah, I can give you that, Jonathan. If you just look at the competitive segment and the way the rating agency is going to look at that with the sale and leaseback debt, we have about $5 billion at the competitive segment. And we have about $22 billion at the parent. Now that includes the unfunded pension obligation as well as essentially the net present value of your sale and leaseback payments that are off the balance sheet. So if you exclude those, you would remove about $3 billion in total off of the consolidated.

Jonathan Arnold - Deutsche Bank

So the parent-specific number is how much? And maybe what the current drawing on parent revolver is?

Jim Pearson

We have about $3 billion drawn on our revolving credit facilities.

Jonathan Arnold - Deutsche Bank

Just to clarify a comment you made on cash flow in the competitive business, I am trying to reconcile some of the slides you put out with the statements that you think that you're not going to need to put any capital into that business. Could you walk us through the assumptions in that, because the CapEx I think you said stays high through 2017?

Jim Pearson

That's correct, yes. That's the period that we will be putting in our Beaver Valley steam generators and head replacements.

Jonathan Arnold - Deutsche Bank

Okay. So despite that, you still expect to be cash neutral in that business?

Jim Pearson

Yes, we do. In 2015, we have the benefit of the higher capacity revenues coming in.

Jonathan Arnold - Deutsche Bank

Okay. You'll also see the proceeds from the asset sale coming through this year ?

Jim Pearson

We'll see some of the capacity benefit in the front-half of '16, but '16 will be a year that we will be spending on our Beaver Valley steam generators and head replacement. But we'll have Davis-Besse done at that time, we'll have a portion of our MATS compliance done. So over this three-year period, we expect that we will be cash flow positive.

Operator

Our next question today is coming from Dan Eggers from Credit Suisse. Please proceed with your question.

Dan Eggers - Credit Suisse

Tony, if you go back to kind of October and November when you guys laid out that you've kind of the bigger focus on utility and you took it to the Board and into the market, there was a set of expectations as far as funding and capital raising and the whole strategic direction, can you just share with us kind of you as a management team and then maybe you as a Board what you guys saw that fundamentally changed your view on conditions now look for the business over that three-month period to get you to this outcome that wasn't more directly addressed when you did a bigger strategic update?

Tony Alexander

Dan, let's take a look at reality. The cost of equity became very, very expensive in a very short period of time. And as we look to a total repositioning of the company, this action seemed to be the most effective way to address what needs to get done and reposition the company more and more towards a regulated platform. So I think that information along with kind of deciding that now is the time to make the move to eliminate the uncertainty, the speculation, the rumors and all the other things that have been going on in the marketplace, we needed to get it addressed. I think this does that most effectively. I think it most effectively positions the company going forward. And it puts the dividend level at the right level, given the refocus of the company on a more regulated platform.

Dan Eggers - Credit Suisse

And I guess just on the distribution utility is kind of showing debt earnings flat to down even at JC P&L assume flat in those expectations, do you guys want to discuss earned ROE specific utilities. But can you maybe discuss which utilities are showing the biggest degradation from '13 to '14? And then if you think about the rate cases in West Virginia and Pennsylvania, will that helpful more meaningfully recalibrate earning if you had fair outcomes for 2015?

Tony Alexander

That's obviously what we're hoping for. So we will be filing cases to get the rebase lined and we should see the results probably in '15, at some point maybe towards the latter end. So you won't see at all, but sometime in '15, I would expect that we will have those companies reset. And again, that would reset three of our major operating areas and we can then foresee with the pattern of growth associated with increasing O&M expenses as well as a return on the additional investments we make.

Dan Eggers - Credit Suisse

So if you stepped on your earnings in '14 versus '13 of up to 10% of distribution utilities is just kind of the reality of time and cost, or is there something unique to create those tougher comps this year versus last year?

Tony Alexander

Well, I think you can look at the drivers and see that some are going to ultimately get reflected, for example, in rates. As we move out of the OPEB advantage that we've been able to have in that business and get it reflected in rates, it will be no longer be a drag, it will be neutral. So there are a lot of moving parts as you begin to think about rate case applications and truing up expenses inside that space here in a transition period between '13, '14 and '15 as we do that. And that is part of the plan.

Dan Eggers - Credit Suisse

And I guess, Jim, one last question just one transmission CapEx. What do you guys use kind of the baseline CapEx to sustain in a normalized CapEx versus the CapEx you have to spend, trying to do the catch-up and get the system in better operating order?

Jim Pearson

We could take a look at baseline. I haven't seen it in a while. It's much lower than the kind of numbers we're talking about, because they include things like RTEP projects that are really baseline projects for us, but are system required projects inside of the transmission footprint. And we all know there are significant RTEP projects associated with shutting down the power plants in and around Cleveland and elsewhere in PJM that have to be addressed over the next several years. So a large portion of our expenditures this year or next year are RTEP and I wouldn't consider them baseline.

Tony Alexander

That's right, Dan. We probably have about $400 million in transmission in 2014 that's associated with the RTEP projects associated with some of the planned retirements we have. So probably your normal transmission outside of our new transmission plan and those types are in the $300 million to $400 million range.

Operator

Our final question today is coming from Paul Ridzon from KeyBanc Capital Markets. Please proceed with your question.

Paul Ridzon - KeyBanc Capital Markets

My question has been answered, but thank you very much.

Tony Alexander

Well, thanks, everybody. We appreciate your time and your interest in FirstEnergy. As always, the IR team will be available if you have any additional questions and thanks for participating today.

Jim Pearson

Thanks, everyone.

Operator

Thank you. That does conclude today's teleconference. We thank you for your participation and have a great day.

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