Greetings, and welcome to the FirstEnergy Corp fourth quarter 2019 earnings conference call. At this time, all participants are on a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Irene Prezel, Vice President, Investor Relations for FirstEnergy Corp. Thank you, Ms. Prezel, you may begin.
Thanks, Doug. Welcome to our fourth 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 risk and uncertainties. Factors that could cause actual results to differ materially from those indicated by such statements can be found on our investor 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 the 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 Q&A session. Now I'll turn the call over to Chuck.
Thank you, Irene, and good morning, everyone. Thanks for joining us. 2019 was another great year and a step forward for FirstEnergy, marked by solid execution on initiatives that benefit our customers, shareholders, communities, and our company. One of the accomplishments that makes us most proud is our record of delivering on the commitments we've made to the financial community. This morning, we announced 2019 GAAP earnings of $1.70 per share and operating earnings of $2.58 per share, which is at the top end of the guidance range we provided on our last earnings call. By executing on our customer-focused growth strategy, along with some benefits from third quarter weather, we successfully mitigated the absence of the Ohio Distribution Modernization Rider in the second half of the year. We've reached five years of consistently meeting or exceeding the midpoint of the quarterly guidance that we've provided.
The culture of execution and ownership that our leadership team has established at FirstEnergy is one you can continue to count on as we improve service for our customers and communities and deliver strong results for our shareholders. Two years ago, we introduced our first long-term growth rate projection of 6% to 8% compounded annually from 2018 to 2021. In the first year, we hit it out of the park. Our 2019 growth versus our original 2018 guidance was 12%, excluding both the Ohio DMR and weather impacts. Our culture of strong execution is clearly evident and has gotten us off to a great start on what now is a five-year growth plan. We're looking forward to a0nother solid year in 2020 as we reaffirm our operating earnings guidance of $2.40-$2.60 per share.
To continue providing investors with clarity into our long-term expectations for earnings growth, in November, we extended the CAGR at a rate of 5%-7% through 2023. As we've discussed, this projection includes plans to issue a modest amount of equity up to a total of $600 million annually starting in 2022. When this happens, it will represent the first infusion of equity into our growth initiative since early 2018. We will have invested approximately $12 billion in our business during that period. By successfully executing on our regulated growth strategies, we have driven strong results for investors. In 2019, our total shareholder return was 34%, placing our stock within the top quartile of the EEI index. The TSR over the last two years, 2018 and 2019, was 71%, making FirstEnergy the number one stock in the EEI index over that period.
Over the past several years, the rating agencies have acknowledged our transition to a fully regulated company with primarily transmission and distribution operations, resulting in a lower risk profile. In 2019, we received numerous ratings upgrades across the FirstEnergy family, as well as at the parent level. With the November upgrade from Fitch, we are making solid progress towards our goal to achieve solid BBB ratings at all three agencies. While we remain focused on making steady improvements to our balance sheet, we believe we are well-positioned to support our plans for growth, including the extended CAGR and associated equity issuance. In 2019, we continued executing on our long-term customer-focused growth plans. This included an annual capital investment of approximately $3 billion in our transmission and distribution infrastructure, which we expect to continue for the foreseeable future.
In our transmission business, we successfully completed year six of our Energizing the Future investment program with more than $6.8 billion in investments during that period. As we reported to you throughout 2019, our customers in the ATSI footprint are seeing measurable reliability improvements, including a nearly 50% reduction in equipment-related transmission outages as a result of the work we're doing to modernize the grid. As we continue extending the program into our eastern footprint, we expect those customers to experience similar benefits. We took another important step in 2019 to continue the expansion of our Energizing the Future initiative. In December, FERC accepted our application to move JCP&L's transmission assets into forward-looking formula rates effective January 1, 2020, subject to refund. With this change, nearly 90% of our transmission business is on forward-looking formula rates.
The forward-looking rate structure in New Jersey supports our plan for approximately $175 million in customer-focused capital spending on the JCP&L transmission system this year. On the distribution side of our business, last month, we received approval from the Public Utilities Commission of Ohio to implement a decoupling mechanism for our residential and commercial customers in the state. The commission also removed the requirement that our Ohio companies file a distribution rate case by 2024. Decoupling provides rate transparency and stability for these customers while providing revenue certainty to our Ohio companies. Rates for 2019 and each year thereafter will be reconciled to 2018 baseline revenues and adjusted through a conservation support rider. There is no impact from the rider on 2019 earnings. That adjustment will be recognized in the first quarter of 2020. Going forward, the rider will be reflected in current period results.
In Ohio, our utilities are moving forward with the $516 million three-year grid modernization program that was approved by the PUCO in July. As we've discussed, the plan includes modernization projects designed to help reduce the number and duration of power outages and allow our customers to make more informed decisions about their energy usage. We expect to complete approximately $170 million of grid mod work this year. This initial phase includes deploying 250,000 smart meters to Ohio customers, implementing time-varying rates, and installing more than 600 reclosers and capacitors on the electric distribution system, which will help automatically isolate problems, prevent entire circuit blackouts, and quickly restore electric service to customers. In Pennsylvania, we completed work on the initial phase of our original $350 million long-term infrastructure improvement plan in 2019. Last month, the Public Utility Commission approved our LTIP 2, spanning 2020 through 2024.
The LTIP 2 program includes a $572 million investment across our four Pennsylvania utilities to accelerate distribution infrastructure projects in the state. The improvement plan for each utility complements the work we already perform on our distribution network to reduce the number and duration of outages experienced by our 2 million Pennsylvania customers. Investments include replacing older poles, lines, and fuses, installing new substation equipment, network vaults, and manhole covers, and reconfiguring circuits. Approximately $120 million of the work is expected to be completed in 2020 across our Pennsylvania service area, with the remainder spent over the next four years. The cost associated with these service reliability investments are expected to be recovered through the Pennsylvania distribution system improvement charge.
You'll recall that earlier in 2019, the Maryland Public Service Commission approved our rate case, an electric distribution investment surcharge, and a five-year electric vehicle pilot program, while the New Jersey Board of Public Utilities approved our JCP&L Reliability Plus initiative. Together, these initiatives position us to improve service to our customers as we enable new technologies and the grid of the future. Later this month, we plan to file a distribution base rate case in New Jersey. We will seek to recover increasing costs associated with providing safe and reliable electric service for our customers, along with recovery of storm costs incurred over the last few years.
To sum up my discussion of our regulated investments, I want to remind you that after the conversion of the JCP&L transmission assets to a forward-looking formula rate, more than 60% of our annual investment will now be in formula rates and distribution riders, making our investment profile very transparent. Finally, I hope you've taken the time to review our five-year strategic plan and our corporate responsibility report, which were both published to our website in the fall. These reports are an important element of our commitment to provide transparency and enhance engagement with our stakeholders. They also offer a platform to track progress on our goals and strategies, including ESG initiatives such as our carbon reduction target, efforts to build a more diverse and inclusive workforce, and our ISS Governance Score.
We're excited to recently earn the Bloomberg Gender-Equality Index designation for the second consecutive year, and last month, we were named to Forbes' list of the best employers for diversity. In addition, we are one of only four companies in our sector to achieve the best possible rating in the ISS governance quality score. We'll refresh the data in our corporate responsibility report when we publish our annual report next month, and we intend to update the strategic plan later this year to maintain a five-year outlook. I think you will see that we are continuing to drive FirstEnergy toward our mission of becoming a premier, forward-thinking electric utility that our stakeholders can trust and believe in. As I mentioned earlier, we are affirming our 2020 operating earnings guidance of $2.40-$2.60 per share.
We're also pleased to affirm our expected CAGR of 6%-8% through 2021, and 5%-7% extending through 2023. In addition, we are introducing operating earnings guidance of $0.60 - $0.70 per share for the first quarter of 2020. Thank you for your time. We had a great year, and we look forward to building on our progress. Now I'll turn it over to Steve for a review of the fourth quarter in 2019.
Good morning. It's great to speak with you today. All reconciliations and other detailed information about the quarter are available in the strategic and financial highlights document that is posted to our website. We also posted an updated fact book to the website this morning, which includes additional supporting materials related to 2022 and 2023, such as our capital and load forecasts. Let's review our results. We reported a fourth quarter GAAP loss of $0.20 per share, driven by our annual non-cash pension and OPEB mark-to-market adjustment. I'll spend a few minutes discussing our pension performance later in my comments. Adjusting for special items, fourth quarter operating earnings were $0.55 per share, which is above the midpoint of the guidance we provided on our last earnings call. In the distribution business, earnings were flat compared to the fourth quarter of 2018.
O&M expenses were lower this quarter compared to the same period in 2018, and distribution revenues were higher. This offset the absence of the Ohio DMR and the impact of more mild temperatures across our footprint. Total distribution earnings increased due to incremental rider revenue in Ohio and Pennsylvania, but customer usage decreased compared to the fourth quarter of 2018 on both an actual and weather-adjusted basis. Heating degree days were 2% below normal, and 7% lower than the fourth quarter of 2018. Residential sales were down 1.3% on an actual basis compared to the fourth quarter of 2018, but increased slightly on a weather-adjusted basis. In the commercial customer class, fourth-quarter sales decreased 4.3% on an actual basis, and 3.5% when adjusted for weather compared to the same period in 2018. Finally, in our industrial class, fourth quarter loads decreased 2.4%.
While the shale gas sector continues to grow, we saw sales decline in every other major sector, including steel, automotive, coal, and chemical. Looking at our load trends for the full year of 2019, we are encouraged to see the stability in the residential sector, where we've recorded two consecutive years of modest growth in weather-adjusted sales. However, full-year 2019 sales to commercial customers were down 2% compared to 2018. Drivers include weaker economic conditions, energy efficiency, and distributed generation measures initiated by customers in the education and food and beverage sectors, and lower usage from the real estate sector related to decreases in new construction. While it's widely recognized that the U.S. has entered into a manufacturing recession, the impacts of that slump, combined with a couple large plant closings, resulted in a 1.7% decrease in deliveries to industrial customers for the year.
Turning back to fourth quarter results for the transmission business. Earnings increased primarily due to higher rate base at our formula rate companies related to our continued investments in the Energizing the Future program. In our corporate segment, fourth quarter results primarily reflect lower operating expenses in the absence of a fourth quarter 2018 contribution to the FirstEnergy Foundation. Before we open the call to your questions, let's spend a moment on a few other financial matters, starting with the pension performance and its impact on our future funding requirements. In 2019, our pension plan investments produced a return on assets of 20.3%, far exceeding our original assumption of 5.7%. This superior plan performance, coupled with the low discount rate of 3.34%, produced two outcomes.
First, our 2019 non-cash after-tax pension and OPEB mark-to-market adjustment is approximately $480 million, which is at the lower end of the range we provided in October. Second, our pension plan funding requirements for 2022 and 2023 have decreased significantly. A year ago, our 2022 funding requirement stood at $382 million. As a result of the robust plan returns last year, this has decreased to $159 million. For 2023, our funding requirement has decreased to $375 million compared to $455 million at the end of 2018. As you know, we normally only mark the pension at year-end, but we will need to remeasure it again when FES emerges from bankruptcy.
Assuming that they emerge in the first quarter of this year, we anticipate an after-tax non-cash loss of up to $400 million based on the discount rate and pension performance. Our corporate liquidity continues to be strong with $3.5 billion of undrawn credit facilities and approximately $465 million in cash. This cash position, plus a portion of revolver borrowings, will fund the final payment of $853 million to FES upon their emergence. Please keep in mind, 2020 will be a transitional year from a rating agency perspective, as this final FES payment will impact our credit metrics. When you exclude this payment, our 2020 credit metrics will be compliant with the thresholds established by each of the three rating agencies.
With respect to equity, we have no incremental needs through 2021, and as we told you at EEI, we plan to issue up to $600 million of equity annually in 2022 and 2023. The ultimate amount will be determined by a number of factors, including customer load, storm activity, weather trends, pension performance, and rating agency metrics. Thank you. We're proud of our results in 2019, and we look forward to continuing our strong progress this year. Now let's take your questions.
Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Greg Gordon with Evercore ISI. Please proceed with your question.
Hey, thanks. Congrats on a good year, guys.
Morning, Greg.
A couple of questions. Looking at the cash flow disclosure you gave, there are some changes relative to what the outlook looked like in the last fact book. I guess when I unpack it looks like the major change is just the delay in the cash payment to the FES creditors and a decision to pay them out in cash rather than take on that tax note associated with the prior settlement. Can you just walk through, I know the former is just timing, but the decision-making on the latter and why you see that as value accretive?
Hey, Greg, it's Steve Strah. The way you explained it is exactly what happened. We were planning to make the payment in 2019, assuming an FES emergence at that point. Obviously that didn't happen. It's going to happen here sometime in February, at which point in time we will fund the cash payment of $225 million, we will also pay what we were previously thinking would be issued as a tax note. We will also pay that tax note in cash. From an economics perspective, it just makes more sense for us to use cash on hand to pay off that tax note now, rather than have to deal with it by the end of 2022 and refinance it again at that point.
I'll just emphasize that point that that means we won't be answering questions about FES for the next five years.
No, we're all happy about that. Two more questions. As it pertains to just obviously a lot of moving parts when you think about the 2022 and beyond potential equity needs. You've said up to $600 million, but one of the pieces that looks like it's gotten better is pension performance means future pension contributions are down by a little over $300 million. All things equal, does that mean that your equity needs are down by potentially up to $300 million?
Well, I would say this. We put a range in there that allows for flexibility for lots of things to change between now and then.
The range of $0-$600 million, including the DRIP, is a range that we expect to stay in. I don't think it should be extracted that it will be $600 million every single year, but it will be within that range depending on where we're at when we get to that point.
All right. It's a fair non-answer. My final question is, I know this has no direct economic impact. It definitely has an impact on your customers. What do you think the Ohio government's response is going to be to the FERC decision on the MOPR rules with regard to the capacity market? Is it possible that the state of Ohio will consider leaving PJM through FRR?
I would say that the state of Ohio has already kind of talked about their disappointment with the PJM market and their intention to use the next one year or so to look at energy policy for the state. The last time they looked at energy policy of the state was 20 years ago, 1999, when Senate Bill 3 deregulated the state. I think there's a lot of disappointment that some of the goals they thought would be achieved through that never materialized. I think there were some unintended consequences that happened that they didn't expect to happen.
I think they're going to fully look at everything from how the utilities interact with the Public Utilities Commission to how we ensure a long-term secure supply of generation for Ohio customers, to how we get back to Ohio being a state that has an energy surplus as opposed to a shortfall. I think there's a lot of things they're going to look at, but beyond that, what our intention is we'll be at the table helping where they want help, providing our guidance where they want guidance, and expressing our views where we feel strongly about certain things should go a certain way.
Do you feel strongly about it one way or the other?
I don't. I'm not in the generation business anymore. I feel strongly that we need to come up with a long-term solution for customers that ensures they have adequate fuel secure, cost-effective generation, not just right now. I mean, it's no. My views on these markets has not changed. A one-year capacity signal three years out, the next hourly short-run marginal cost signal is no way to do this business for the long haul, they are failing, something needs to be done. Whether Ohio decides to step up and do something is up to them. I do not think the market as constructed today is going to provide the best long-term outcome for my customers.
Thank you.
Our next question comes from the line of Praful Mehta with Citigroup. Please proceed with your question.
Thanks so much. Hi, guys.
Hi, Praful.
Hi. Maybe just firstly clarifying something more specific. On page 11, you have regulatory charges for the fourth quarter in the distribution business, which is adding back about $0.15 of earnings to get to more operating earnings. What specifically does that $0.15 relate to?
Praful, this is Jason Lisowski, Chief Accounting Officer. That is related to a FERC order that reallocated some transmission expenses across our utilities. As you may recall, in Ohio, we at the time in the past did not have the ability to pass those on to customers. It ended up being actually a refund and a credit back to Ohio companies. Since in the past, we were excluding that from our non-GAAP operating earnings, when we receive that credit, we consistently also exclude it from our non-GAAP operating earnings.
I got you. That's helpful. Thank you. In terms of longer-term growth, the 2021 to 2023 earnings profile, based on the growth that you've talked about, looks like a 4.5% earnings growth, if I just were to use the math for the last two years. I'm assuming some of that is obviously a slower rate-based growth and then the equity need. Can you just walk through or help us understand what kind of rate-based growth you're assuming for the last two years in the current forecast, and how much dilution do you expect versus from rate base to EPS?
Well, I'll answer this. The CAGR that we've given you for the next five years is the CAGR that we expect to hit, which is 6%-8% for the first three and then 5%-7% after that. I'll let Jason try to walk you through the rate base accounting that gets to that. As I've told you many times, when you look at our company from the outside in, trying to align up what you look at with the regulatory accounting that goes on, because it's no longer just the same simple math that it used to be, is difficult. We'll have Jason try.
Yeah. Praful, if you look at the fact book that we released this morning, we actually do show our expected rate base growth both separately for the regulated distribution and regulated transmission through 2023 broken down by each state. You will see that in 2022 and 2023, there is still growth, but that growth does slow down a little bit.
Okay, fair enough. I'll dig through that a little bit more and discuss that. Then just finally on the equity needs point. I understand that clearly the pension has helped, so that should help reduce the equity need a little bit. Wanted to understand in terms of balancing other goals right around leverage, holdco debt. What are the key guideposts that we should be thinking about as you think about the equity up to $600 million? What could help bring it down apart from pension? What could kind of lead to pushing it up? Just few of those guideposts would be helpful.
Obviously, one thing that could help bring it down is if we eventually see some reasonable load growth throughout our footprint. Just a little bit of load growth can have a huge impact. We give a range for a reason. I mean, the performance of the pension plan can continue to affect what's needed there. I wasn't trying to dodge Greg's question. I can't sit here today and tell you how much equity we're going to recommend we issue in 2020, 2022, 2023, 2024. It's not going to be more than $600 million. I can confidently say that.
Got it. Really appreciate it, guys. Thank you.
Our next question comes from the line of Julien Dumoulin-Smith with Bank of America Merrill Lynch. Please proceed with your question.
Hey, good morning, team.
Morning, Julien.
Hey. Perhaps just to pick up on a slightly different state and angle, can you talk a little bit more about New Jersey and the energy master plan here? Specifically, how do you see opportunities emerging from that and/or some of your peers in their respective clean energy filings in parallel? I'm thinking, AMI or otherwise. As well, can you touch on some of the commentary in the EMP with respect to a reduction or meaningful reduction in gas? Obviously, you guys aren't in gas, but conversely, how do you think about the electrification implications that seem to be pretty clear in the EMP as well? Perhaps touch holistically on the New Jersey business, given everything going on, if you don't mind.
Okay. Well, there's a lot in that question. I was just over in New Jersey last week. I met with three of the BPU commissioners. I met with the governor and his policy team the afternoon after he rolled out the energy master plan. I had a lot of opportunity to talk with him and his team in particular about how I think our company can help him be successful with it. I think there are opportunities for us to help, particularly in the electric vehicle area, if the state decides to embrace utilities investing in building out a robust charging network throughout the state.
I think advanced metering is something the state has to decide what their policy is on, but we've got a lot of experience now in Pennsylvania with nearly 2 million meters there, and we're going to be rolling out 250,000 in Ohio. What I offered is, we'll come to the table and help them understand the pros and the cons, because there are both, that we see to help them make an informed decision on that. I was very honest with him that I have no intention to get into investing in offshore wind. That's not something I see us taking on at this point in time. I talked with him about transmission, and I know the BPU President made some comments about transmission, so I might as well just address those here because I know I'm going to get a question.
His comments were specific to the network transmission service charges in the BGS auction for one company, and that company was not us, by the way. I saw what happened in the market with our stock yesterday after his comments became public. I think the market should be smart enough to figure out that that involved one company. Should also be smart enough to figure out, as he said at the end, that FERC sets transmission rates, not the BPU, and they're not going to set different ones for New Jersey than they do everywhere else. It should also be smart enough to figure out that what we've told you all along is 90% of our transmission capital investment is in states other than New Jersey, and 90% of all of our $3 billion of investment is in states other than New Jersey.
What I talked to the governor and his team about is the fact that our transmission plan, if we work together, can be complementary to what he's trying to do with his Energy Master Plan and actually enabling of what he wants to do with his Energy Master Plan. They were very receptive to that, and we agreed to continue to work together to figure out how to make that happen. All in all, I think FirstEnergy is at the best place that it's ever been in New Jersey in terms of our relationships, in terms of the things that we're doing, in terms of us being trusted advisors to the governor's office on his Energy Master Plan.
There was nothing in that energy master plan that scares me in any way, but there are pieces and parts that I think we can help more on, and there's pieces and parts that we don't want to be part of.
Just to clarify on that, could this be incremental capital? I know you guys talked about a very specific and committed equity capital plan and financing plan through the forecast period, but I just also hear your comments about helping the state of New Jersey here too.
The reason we have a range in this CapEx plan that we've communicated is so that we have the ability to have flexibility to move it around state to state, transmission to distribution. I'm not going to sit here and tell you that we're going to add incremental capital beyond the range that we've given you. The range that we're giving you is it's got a couple control rods in it. One is our customer's ability to pay, and a constant awareness of the fact that without load growth, these are going to be rate increases for customers, and we have to be careful with that.
The other control rod being the balance sheet and managing the amount of equity that we ultimately are going to need to do to maintain our credit where we want it and get to that goal of being BBB-rated with all three agencies. We're going to use this range that we have to satisfy what we're going to execute from a work plan in all five states. I'm not planning to change that range in the near term.
All right, great. Well, best of luck. Thank you.
Thanks, Julien.
Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.
Hey, guys. Thanks for taking my question. Chuck, you only really own regulated generation in one state, West Virginia. Just curious how you're thinking about the potential for changes to the generation fleet, the composition of the generation fleet, maybe especially since the state sitting on the Marcellus Shale, whether the economics make sense for the company and the customer to add a little bit more gas-fired generation into the regulated mix there. Obviously, is there a need for an uptick in either renewable or even smart grid on the distribution side CapEx in West Virginia?
Well, you make a good straight man because you can help me reemphasize the point that one of the things that I think differentiates us from many others in our sector is we are a transmission and distribution company by and large. We have four states that are deregulated, so we don't own generation there. That creates a risk profile that's very low risk. We don't have the risks that go along with owning massive fleets of generating plants, particularly coal and coal waste disposal sites and so forth. In West Virginia, the process is real simple. We're going to file an integrated resource plan in West Virginia by the end of this year. We'll share our ideas with West Virginia about where we see their capacity needs being, some thoughts on how to meet that.
Those decisions are going to be made in conjunction with the state of West Virginia. I think that there are opportunities to embrace what's going on with the shale development, and they're capitalizing on it with a lot of industrial growth in that state in terms of collection and compressing and so forth. Whether they want to capitalize it in terms of generation sources, that remains to be seen. I don't want to speak for the state of West Virginia, but up until now, at least, they haven't been real welcoming to renewables there. From a FirstEnergy perspective, as we get separation from this whole FES issue and put that behind us, I think investment in renewable generation in a regulated context is something that we need to be thinking about adding to our portfolio. Not deregulated in any fashion.
We worked so hard to get to this company that I just said. It's a T&D company, low risk, no exposure to markets. That's where we want to stay. Any generation we might invest in is going to be earning a regulated rate of return, just like those two plants in West Virginia do.
Got it. One other question, totally unrelated. Just curious, what's embedded in guidance in terms of O&M growth rates across the distribution business and also at the corporate level?
What's embedded in our guidance is.
Yes
Keeping O&M flat over that period. What I've challenged the team to do is to get more efficient at how we deliver service to customers. We're in the process of rolling out an innovation center at FirstEnergy. We've got a number of employees who have earned black belts in innovation engineering. We're going to put them all into one group. We're going to use that group to help drive innovation throughout this company as a way to make us more efficient and offset, we give, this year, a 3.5% wage increase on the average to our employees, about half of which ends up O&M. We've got to find a way to offset. What's in the guidance period is flat O&M throughout that period.
Got it. Starting off of a 2019 base or starting off the 2018 base? Was there anything unusual in 2019?
Starting off of when we finished FE Tomorrow and finished dealing with our corporate costs. Which, by the way, our T&D costs are bottom decile as far as O&M, and now our corporate costs are bottom quartile in terms of low being good in both cases. We've got this company very lean, and we expect to keep it that way throughout this period.
Got it. Thank you, Chuck. Much appreciated.
Thank you.
Our next question comes from the line of Charles Fishman with Morningstar Research. Please proceed with your question.
Yeah. Chuck, 90% of your transmission now in that one slide you showed was formula-based or forward-looking. What gets you to that last 10%? Is it a process similar to what we saw in New Jersey?
What's the timing on that, do you think?
Well, what's left that is not forward-looking formula rates is the former Allegheny system. Yes, the process would be to either eventually merge that into one of our existing transcos or form another transco. The timing is such that we'll do that when it makes the best sense in terms of there will be a crossover point where the investment returns more returns to shareholders in a forward-looking formula rate than it does in a stated rate. Right now, the stated rate is better for all of you.
Okay. Second question. When we last talked in November, you hadn't finished the planning process, and you wanted to hold off on guidance through 2023. As you wrapped up that process, in your mind, was there anything that, I don't know, surprise is probably too strong of a word, but maybe was a little different than you thought as you wrapped up that process?
No, not at all.
Okay.
I think it's very difficult to predict the future five years out. A lot of what we had to get comfortable with in that planning process is what's the world going to look like, not today, but what's the world going to look like in 2023? What's going to happen with inflation? What's going to happen with growth, et cetera? Bracket those types of things. One thing I can tell you I am confident in is that we're going to execute on the plan that we put out to this company. If it's $3.2 billion or $3.3 billion or $2.9 billion, it's going to deliver the results that we intend to deliver. By getting to the point where more than 60% of all of it is in formula rates, it's very transparent and easy to calculate.
Where we need to have rate cases, we're going to have them, just as I said. We're going to file a rate case probably this month in New Jersey to get that trued up, recover some storm costs that we've deferred up until now. Our ability to execute on rate cases, we've demonstrated we can do that, too. It was just really more getting comfortable with a range of outcomes that could happen between now and then to get comfortable with the CAGR and get comfortable with the equity assumptions both.
Okay. That's all I have. Thank you.
The only other thing I'd add, I said this repeatedly at EEI, I'm not going to tell you something until I know the engineer in me is still in there. We got to have the plan, and we got to have the numbers work, and I know we can execute on it, which is why I was probably a little slow in getting to a five-year CAGR. That's also what results in five straight years now of meeting or exceeding every single quarter that we've given you guidance.
Our next question comes from the line of Andrew Weisel with Scotiabank. Please proceed with your question.
Hey, good morning, everybody.
Good morning.
My first one, I just want to follow up on the New Jersey questions earlier. I believe in the CapEx outlook, do those forecasts include some level of spending related to things that were covered by the Energy Master Plan, like energy efficiency, EVs, AMI? Will those buckets be part of the upcoming JCP&L rate case filing, or would they come later in separate compliance filings or something like that?
No, they don't include anything for that right now. It's about $175 million in transmission. You know what the IIP is. We're going to round out the first round of IIP. At some point in time, hopefully you'll see IIP- 2, just like you saw LTIP 2 in Pennsylvania. When that comes, again, that's why we have a range of CapEx, so that we have the ability to have flexibility from state to state and T&D.
Okay. That would be upside to the current numbers if there were to be spending on that.
Might be upside in New Jersey, but it would probably come away from somewhere else. You can count on the capital plan being what I've told you it is, and we're going to get the CAGR that I've told you we're going to get, but the pieces and parts of it may move around from state to state.
Got it. That's helpful. Last, this is just kind of a small one, but in Pennsylvania, congratulations on getting the LTIP 2 approved in full. My question is on the DSIC rider. The benchmark ROE was just reduced by 10 basis points, I believe yesterday, to 9.45%. Does that apply to your subsidiaries? If so, could you give any sort of earning sensitivity? I know this just came out yesterday, so it doesn't give you a whole lot of time, but any thoughts on that?
Eileen's on top of it.
Good morning. It's Eileen Nicholson. I'm Vice President of Rates and Regulatory Affairs. Thank you, Chuck. Yes, we are aware that the PAPUC reduced the benchmark for the ROE in Pennsylvania yesterday to 9.45%. Where that benchmark is used, it really relates to our DSIC calculation. For utilities that have not had a base rate case in the last two years, they substitute that ROE benchmark number into their calculation when they calculate their DSIC revenue. For our four distribution utilities in Pennsylvania going forward, we'll use in our return calculations a return on equity of 9.45% rather than the 9.55% that we've been using in the past, which really the 10 basis points across those DSIC calculations. It's immaterial change to the revenues that we'll collect under those riders.
The second thing that ROE benchmark is used for is really a customer protection to say to the extent that the utilities have earnings in excess of that benchmark that they report in their quarterly earnings reports. If they exceed that benchmark, they will have to turn off their DSIC recovery until such time as their earnings fall below that. We've looked at those numbers overnight. We're confident that it doesn't change our outlook for DSIC collection during the planning horizon. I would put a caveat on it to say we do have a settlement pending before the Pennsylvania Public Utility Commission to increase the cap we have in Penn Power. Assuming that's approved, we expect to be able to continue to collect DSIC across all of our utilities throughout the planning period.
Okay, great. That's very helpful. You mentioned Penn Power. Is there a potential for a Penn Power rate case sometime soon?
I don't think we're expecting a Penn Power rate case over the planning horizon. Largely that's because we were able to reach a settlement with the other parties in Pennsylvania that's pending before the commission to allow us to collect this revenue up to 7.5% of our base distribution rates in Penn Power, where for all the other utilities it's capped at 5%. That really allowed us to cover that additional investment through the DSIC rider and eliminated the need for a base rate case.
That's great. Chuck, is it fair to say that JCP&L might be the only rate case through 2023?
I'd say that's a fair way to look at where we're at today, yeah.
I would just, again, it's Eileen, I agree with Chuck, put a caveat on it that we do have an obligation in 2023 to file an additional base rate case in the state of Maryland.
Right. Good reminder. Okay, thank you so much. Our next question comes from the line of Sophie Karp with KeyBanc Capital Markets. Please proceed with your question.
Hi. Good morning.
Good morning.
I have a question on load growth. You guys clearly mentioned that as one of the factors that can help offset equity needs or impact your planning in a way. Despite sort of a strong overall economy, it doesn't seem like we're seeing a lot of that in Ohio or elsewhere, maybe in your territories. Could you discuss that a little bit and maybe give us some sense of what you are seeing on the ground and what can change that to actually see some positive load growth? Thank you.
Sophie, this is Steve Strah. We're conservative in terms of the load growth that we do put into our plan. Right now, I believe we will see more of what we've seen in 2019. That is basically flat load growth to slightly declining load growth. Just looking at 2019 for a moment, we were down 1.1%, and that was slightly lower than our guidance, which was 0.6%. When we estimate it, we're pretty good at estimating where we're going to land. We didn't miss it significantly. In terms of sensitivities, the 1% decline that we saw in 2019 versus the guidance really impacts earnings only about 2%. That's really driven by the residential sector.
Our commercial and industrial loads are really, and rates are fixed or having demand rates which are not as impactful. Right now we do see the manufacturing recession continuing on in 2020 before we start to see recovery. We're hopeful to start to see that recovery in mid-year or a little bit later. Right now I would just say look forward to flat load growth within our territory. We don't really see that changing significantly. The only thing that I would add that I think in the back half of this planning period that we're talking about that could be significant is this Shell cracker plant in Western Pennsylvania. Empirically, as economists look at the world, it's difficult to factor that in, but I just drove over there for a meeting last week.
It's due to come online end of 2021, so it's a year and a half away. It won't be a lot of load itself because they're going to self-generate with the methane that's a waste product of the cracking process. The industrial load that's going to pop up and is already popping up, you're starting to see cranes in the air on other sites, I think can have an opportunity to jumpstart this economy in Eastern Ohio, Western Pennsylvania, Northern West Virginia. We are now starting to see construction progress on the cracker plant in Ohio too. The combination of both of those I think can be something that could be a good surprise, and it's difficult to factor into the numbers. Yeah, I would also add, Sophie, lastly, we are encouraged by seeing the two consecutive years of residential load growth, albeit modest.
We look at that as being very positive for some of the reasons I mentioned earlier. I don't want to be too much of a downer at all.
Thank you.
Look, you're in Northeastern Ohio. We've got Ford investing over $1 billion in two plants in Northeastern Ohio. GM had just announced a state-of-the-art battery manufacturing facility in Ohio. The former Lordstown plant is being repurposed into an electric vehicle, light-duty, medium-duty truck facility. When those things all get done, the job market and the economy is going to benefit from all that. In the back end of this planning period, I'm optimistic that we can see some growth.
Got it. Thank you.
Okay. Well, I see no other questions in the queue, so thank you again for your support really over the last five years since I've been in this job. I think we intend to have another year in 2020 just like we've had the last five years. We expect to be a fully regulated company here by the end of this month with FES behind us, and then just move on from there. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.