Prompt:
Human: Joining us on the call today are members of the media.
During our question-and-answer session callers will be limited to one question in order to allow us to accommodate all those who would like to participate.
I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act.
Joining us on the call today are Raj Subramaniam, President and COO; Mike Lenz, Executive Vice President and CFO; and Brie Carere, Executive VP, Chief Marketing and Communications Officer.
And now, Raj will share his views on the quarter.
As expected, we are seeing strong levels of volume in our network given unprecedented levels of shopping and shipping this holiday season.
FedEx Ground had an outstanding Cyber Week, with 100 million packages picked up during the first official week of peak.
Our ability to handle this influx of packages has been years in the making as we have taken deliberate steps to enhance our unparalleled network to support customers, large and small.
This includes strategically adding more capacity across our network to support our growing customer base.
For example, at FedEx Ground, this means adding 14.4 million square feet to our network, the equivalent of 300 football fields since June of this year.
In Q2 alone, we brought online 24 major expansion projects, with nine of them starting operations in November just weeks before peak.
While it was important that these facilities were up and running to add to a capacity in time for peak, experience tells us that they will operate with increasing efficiency in the weeks and months ahead.
As we shared on the Q1 call, overcoming staffing and retention challenges due to the constrained labor market has been a key focus.
We continued to take bold actions in Q2 to hire and invest in our frontline team members and thus increase network efficiency.
These actions including pay premiums, increased paid time off and tuition reimbursement.
I am pleased to share that we have made considerable traction in recruiting frontline positions.
Last week, we exceeded 111,000 applications, the highest level in FedEx history.
To put this in perspective, we had 52,000 applications the week of May 8.
This has led to appropriate staffing levels of peak, including having more than 60,000 frontline team members since we last spoke in September.
We delivered strong results for the quarter with an 11% increase in adjusted operating income, which exceeded our initial expectations shared during the Q1 call.
Second quarter results include outstanding performance by our team at FedEx Express, where operating income on an as-adjusted basis exceeded $1 billion for the quarter.
The ability we have at Express to flex our cost structure and network in response to changing market conditions positions us for long-term sustained profitability.
FedEx Freight also delivered a strong quarter with an operating margin of 14.7%.
I am proud of the team as they continue to focus on revenue quality and profitable growth.
We estimate the effect of labor shortages on our Q2 results was approximately $470 million, in line with our original expectations.
And consistent with the first quarter, Ground once again, bore the majority of these costs to the tune of $285 million.
While Ground's results were negatively affected by labor challenges in the first half of the year, we are encouraged by hiring momentum as we look to the second half and are focused on retaining recently hired team members after the peak season concludes.
We know we have an excellent value proposition for employees, which we are strengthening even further with technology that enables employee-friendly, flexible schedule options, including the ability to pick up extra shifts when convenient or swap shifts with a colleague all from the convenience of an app on their phone or computer.
All of this to say we anticipate cost pressures from constrained labor markets to partially subside in the second half of the fiscal year.
Now, it's a good time to focus on what is ahead for FedEx.
The FedEx business has been built over nearly five decades.
And during that time, we have built networks and capabilities that are differentiated from our competitors and nearly impossible to replicate.
Our customers and their customers value these networks and capabilities as we enable global supply chains to stay connected.
This has never been illustrated more clearly than during the last two years of the global COVID pandemic.
Our industry has proven to be absolutely critical in delivering during this pandemic, whether it is business-to-business or e-commerce.
And within this industry, our strategy is unique.
Our future growth and profitability will be driven by our strategy and we will drive total shareholder value over the immediate mid and long-term.
There is solid momentum in our base business as we continue to lean into the dynamic growth of e-commerce amid a robust pricing environment.
In addition, we have other levers for profitable growth, including number one, increasing collaboration and efficiency to optimize our networks and businesses; number two, driving improved results in Europe and international; and number three, unlocking value by digital innovation.
Our expanded collaboration across operating companies will drive cost benefits, lower delivery and line-haul cost and better utilization of existing assets.
Said differently, we'll utilize our air and ground networks in a smarter, more calculated manner.
FedEx Freight trucks have traveled four million miles while operating on behalf of FedEx Ground this year.
FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched nearly 50,000 times.
We will continue to look comprehensively at all assets in our network, including stations, hubs and equipment to put the right package in the right network at the best service for our customers.
And as I highlighted earlier, the focus on collaboration also extends to our customers as we work to make their supply chains smarter.
This includes providing integration and common data platform opportunities and planning the best way to leverage our network flexibility for their volume needs.
The second lever is continuing to improve our international profitability.
Our international business, particularly Europe, remains one of our biggest opportunities.
I was in Europe in October, and I was happy to note the excellent progress there as we build upon the success of station integration, which was completed in May 2021.
We remain on track for the completion of our air network integration in April 2022, which will complete the physical integration of TNT into FedEx Express and enable full physical interoperability of these networks.
After April 2022, Paris' Charles de Gaulle Airport will serve as the main hub for all European and intercontinental flights.
Liege will connect specific large European markets and ensure we have the flexibility to scale our operations in response to market needs, thus enabling us to focus on international growth.
Brie, will share more on what this enhanced value proposition means for our customers.
Finally, we are unlocking value through digital innovation and our accelerated integration of data-driven technologies and enhanced digital capabilities ranging from increased network efficiency to customer experience improvements.
For example, early package visibility enhances visibility of third-party trailers as improving customer collaboration, information sharing and package prioritization.
Model-driven estimated delivery date uses machine learning to provide a more accurate estimated delivery day of packages to customers and recipients.
And trailer load scan automation eliminates the need for a manual scan enabling faster and more efficient loading while significantly reducing package touches.
These ongoing investments, network capacity, automation and technology, have helped FedEx build the most flexible and most responsive network in the industry, affording us significant competitive advantages.
In closing, the successful execution of our strategies continues to drive high demand for our differentiated services.
We remain confident in these strategies for the various reasons outlined.
Our unparalleled portfolio of services powered by the strength and reach of our global network positions FedEx to deliver superior, sustainable financial returns and drive shareholder value for years to come.
With that, let me turn this floor over to Brie.
Q2 delivered our second consecutive quarter of 14% revenue growth, demonstrating the strong demand for our differentiated portfolio and our ability to drive revenue quality as a result.
Constrained capacity has continued to support a favorable pricing environment.
We are maintaining a brisk pace for repricing contracts, ensuring a high surcharge capture and yield improvements.
We are working with large customers to identify opportunities, to move their volume from our national network to our regional and local networks, freeing up additional capacity for small business customers.
Small businesses relied our market-leading transit times in our seven-day a week network to compete.
They cannot forward deploy inventory at the same scale as large retailers.
Our domestic yield growth was 9.1% with fuel in Q2.
Our general rate increase will take place in January and we expect a strong capture rate.
In January, the Ground Economy peak surcharge will be replaced by the new Ground Economy delivery surcharge at a $1, solidifying the price point for our Economy product.
And as a reminder, FedEx Ground Economy was formerly FedEx SmartPost.
The landscape across the industry remains robust and positions us well for continued profitable growth.
We are forecasting that the U.S. domestic parcel market will reach 134 million pieces a day by calendar year 2026, a remarkable 70% growth from 2020.
E-commerce is expected to drive 90% of the parcel market growth.
We have developed a tremendous portfolio of e-commerce solutions and we are very confident that our competitive value proposition will enable us to continue to take share smartly in the addressable e-commerce market.
As you all know, we have a diversified customer base globally as well as here in the United States.
And as such, we can confidently grow without the risk of a very large and disruptive customer negotiation.
The U.S. domestic B2B market is also expected to grow.
It will grow at a 5% CAGR through 2026.
We are growing our digital capabilities to provide a range of visibility experiences that will give our B2B customers greater clarity, confidence and control over their deliveries, especially in high-value verticals such as healthcare.
Turning now to international.
Our successful commercial and operational execution in response to COVID demonstrates our ability to grow profitably in an uncertain environment.
Demand out of Asia continues to contribute strong revenue and profit performance and our international economy embargo and peak surcharges are contributing to our yield growth there.
Q2 Express international export yield grew 12% and volume grew 7.6%, which is outstanding year-over-year growth.
International export composite yield grew to almost $54 per package, while average daily volume was more than 1.1 million.
I am very proud of the international revenue quality results, especially given that we also had double-digit e-commerce growth internationally, which, of course, puts downward pressure on our package yield.
International Priority Freight had a very strong quarter with 34% year-over-year revenue growth year-to-date.
With new variants of COVID causing uncertainty in the global recovery, we believe that air cargo capacity will remain constrained through calendar year 2022 and a full recovery is not anticipated until at least 2024.
Export demand in Europe and APAC has fully recovered to pre-pandemic levels and capacity on international lanes remains scarce.
We anticipate a continued favorable pricing environment and an embargo on our deferred services out of Asia Pacific for the foreseeable future.
We are targeting both B2B and cross-border e-commerce market share internationally.
We have identified the target lanes for B2B growth where we have shared growth opportunity, most notably in and out of and across Europe.
As Raj alluded to, with the launch of our integrated air network in April, we will dramatically enhance our capabilities within and into Europe, creating benefits for customers around the world.
More European customers will have access to next-day and pre-noon delivery times for their intra-European shipments through our expanded portfolio of services.
We will be able to offer customers an option of mid-day or end-of-day service in-bound to Europe, giving our customers around the world more choice and flexibility while giving our global sales team more opportunities to pursue.
These enhancements, along with our intra-Europe road services and industry-leading Europe to U.S. service, position us with a very competitive portfolio.
As we approach the final stages of physical integration this fiscal year, we are increasing the FedEx brand presence on the road in Europe by approximately 30%, including the rebranding of vehicles and facilities.
Additionally, intercontinental e-commerce will contribute approximately half of the growth in the parcel market over the next decade.
FedEx International Connect Plus, which launched across Europe, Asia Pacific and the United States, enables us to compete more effectively in this growing e-commerce market.
In addition to the improvements in our transportation portfolio, we are very focused on our digital solutions across the customer journey.
We have launched our new account opening application in eight countries with very great results.
We are seeing double-digit improvement in account openings and customers opting in for My FedEx Rewards, which, of course, is the only small business loyalty program in the industry.
We have also launched our new FedEx Ship Manager application in more than 100 countries.
This is the primary tool for our small business segment to ship with FedEx.
With the modern, easy-to-use interface, a small business can now create a label and get the package out the door more than a minute faster than they could previously.
We will launch this new FedEx Ship Manager in the United States in 2022.
In summary, we are very confident in our commercial strategies for revenue growth and yield improvement.
Given the historically challenging nature of peak season, along with the continued staffing challenges felt by numerous companies around the world, we are quite pleased with our second quarter consolidated financial results, with adjusted operating income up 11% year-over-year.
While adjusted earnings per share was unchanged year-over-year, this year's effective tax rate was significantly higher as last year's earnings included a $0.71 per share discrete tax benefit from favorable guidance issued by the IRS.
As we anticipated, most of the headwinds we experienced in the first quarter persisted through the second quarter, which dampened our Q2 profitability by an estimated $770 million.
To further unpack our second quarter results, I will highlight several key drivers.
The difficult labor market once again had the largest effect on our bottom line, representing an estimated $470 million in additional year-over-year costs.
As I did last quarter, I'll separate the effect of the labor market into two components; higher rates and network inefficiencies resulting from labor shortages.
Of the $470 million, we estimate $230 million was incurred in higher wage and purchase transportation rates.
This included higher wage rates and paid premiums for team members and higher rates paid for third-party transportation services.
We estimate network inefficiencies resulting from labor shortages, increased costs by approximately $240 million.
These costs include additional line-haul, higher usage of third-party transportation, cost to reposition assets in the network over time and recruiting incentives all to address staffing shortages.
Beyond the labor effects, our results for the second quarter also included the following headwinds; $90 million related to investments in the ground network, as Raj outlined earlier, that are critical to improving service and adding capacity; an estimated $75 million in incremental air network costs at Express due to the continued effect of COVID restrictions on our operations; and lastly, a $70 million effect year-over-year from higher federal excise taxes as the waiver ended on December 31, 2020.
With that overview of the consolidated results, let's turn to the highlights for the segments.
Ground reported $8.3 billion in revenue, a 13% increase year-over-year, with operating margin at 5.8%.
The results at Ground in the second quarter with operating income and margin down are not where we would like them to be and our teams remain very focused on improving performance.
Ground operating income was down approximately $70 million and in addition to the $90 million I mentioned earlier, results were significantly affected by higher wage and purchase transportation rates and network inefficiencies amid the constrained labor market.
Express adjusted operating income increased to over $1 billion and reported an adjusted operating margin of 8.8%, which was driven by higher yields and international priority volume growth, which more than offset the negative effects of continued staffing challenges and COVID-19-related air network inefficiencies.
Freight had another outstanding quarter with an operating margin of 14.7% as revenue for Q2 increased 17% year-over-year and operating income increased 33% year-over-year.
Our Q2 results include a net pre-tax non-cash mark-to-market loss of $260 million related to the termination of the TNT Express Netherlands Pension Plan and a curtailment charge related to the U.S. FedEx Freight Pension Plan.
Now, let's pivot to capital spending.
Year-to-date, we spent $3.1 billion in capital as we continue to invest in our strategies for profitable growth, service excellence and modernizing our digital platforms.
Our capital forecast for fiscal 2022 remains at $7.2 billion and less than 8% of anticipated revenue.
We ended our quarter with $6.8 billion in cash and are targeting approximately $3 billion in adjusted free cash flow for FY 2022, which puts us on pace to deliver over $7.5 billion in adjusted free cash flow for FY '21 and '22 combined, far exceeding our historical levels.
These cash flows have provided extensive flexibility as we continue to focus on balanced capital allocation and strengthening our balance sheet.
As a result of this flexibility, I am pleased to announce our Board has approved a new $5 billion share repurchase authorization.
And as part of this program, we expect to enter into a $1.5 billion share repurchase program that will be completed by the end of the fiscal year, which is on top of the $750 million of repurchases in the first half of the year.
This new program highlights the tremendous confidence we have in our business and underscores our commitment to driving value for our shareholders.
During Q2, we also made a $250 million voluntary contribution to our pension plan, which mitigates PBGC fees and further strengthens the funded status of our plan for our employees and we expect to make an additional $250 million contribution in February.
As for our FY2022 guidance, we are raising our full-year adjusted earnings per share range to $20.50 to $21.50 to reflect second quarter results and outlook for the second half of the fiscal year as well as the expected benefit from our ASR transaction.
This improved outlook represents another outstanding financial year with a year-over-year increase in adjusted earnings per share ranging from 13% to 18%, following our strong 2021 results.
While the second quarter exceeded our expectations, uncertainty remains across many fronts, including the labor market.
We are closely monitoring developments related to the federal vaccine mandate, ongoing pandemic developments and inflation as we consider our outlook.
Labor headwinds will persist in Q3, but the labor availability and network inefficiency component will continue to mitigate as we move through the quarter, given our progress to date and plans to address this.
In addition, we do not expect a recurrence of approximately $1 billion in notable second half headwinds from a year ago that included the timing of variable compensation expense, historic severe winter weather, a one-time express frontline bonus and our commitment to the Yale Carbon Capture initiative.
In summary, the successful execution during the second quarter of our strategies amid a very dynamic environment gives us confidence in our updated outlook for the remainder of fiscal 2022 and beyond.
In closing, I do want to take a moment of personal privilege here.
While not on these calls, many of you are familiar with John Merino, our longtime Chief Accounting Officer, who signed our 10-Qs and 10-Ks.
John has been integrally responsible for the quality and integrity of our financial information.
And after 23 years with FedEx, he will retire at the end of this month.
And now before we move to the Q&A, our Chairman and CEO, Fred Smith, has joined us and would like to share a few words.
As promised on the June Analyst Call, I am here to answer any questions specifically for me.
This time of year is challenging, especially for those working tirelessly on our frontlines, but your hard work and dedication to keep our purple promise for our customers is evident by the Q2 results, Raj, Brie and Mike have covered well today.
I'm pleased to announce we will be hosting an Investor Meeting on Tuesday and Wednesday, 28, 29 June 2022 in Memphis.
Mickey will share details after the New Year.
I'll now pass it back to him to begin the Q&A portion of the call.
Now, I'd like to open our question-and-answer session, and please remember, callers are limited to one question, so we can accommodate everyone.
 Assistant:

Chosen response:
new $5 billion share repurchase program authorized, including $1.5 billion accelerated share repurchase program.
sees fy capital spending of $7.2 billion.
continue to forecast improved earnings and margins for our fiscal year.
in quarter challenging labor market affected availability and cost of labor resulting in network inefficiencies, and higher wage rates.
fedex is unable to provide a fiscal 2022 earnings per share or effective tax rate (etr) outlook on a gaap basis.


Prompt:
Human: Our remarks today may contain information other than historical information.
Please note that we are relying on the safe harbor protections afforded by federal law.
All such remarks should be considered in the context of the many factors that affect our business, including those disclosed in our Form 10-K along with other SEC filings.
Management's statements may include non-GAAP financial measures.
The U.S. drilling rig count in the third quarter was down over 70% from the previous year and 35% from the second quarter 2020 to the lowest levels on record.
Despite this collapse, Forum was able to limit our revenue decline to just 9% sequentially as our revenue from outside North America was up 14%.
Also, we were able to improve our EBITDA through further cost cuts and efficiencies and generate positive free cash flow.
It is important to note that Forum's operating results are directly related to the level of oil service drilling and completion activity.
Most of our business is selling short cycle products to service companies to sustain, replace and upgrade their drilling and completion operations.
We believe the third quarter was clearly the bottom in oil service activity and drilling and completions activity are now rebounding.
We began to see an increase in our orders in the latter part of Q3, resulting in an 8% sequential increase in our bookings in the third quarter.
We expect a strong increase in our inbound orders in Q4 and as our customers put equipment back to work.
We are also participating in the new equipment orders in the Middle East and Asia as well as non-oilfield activity for our subsea business.
These increased bookings in Q3 and Q4 will drive higher revenue for Forum in Q4 with impressive incremental margins.
We have made dramatic progress in reducing our cost structure since we began these efforts at the beginning of 2019.
Our cash costs, excluding our materials costs, are down almost 50% over this period as we have significantly reduced our overhead expense.
I am also pleased with the progress on our debt structure and our liquidity position.
In August, we extended the maturity of our bonds from 2021 to 2025, and our ABL credit facility is undrawn.
Forum is positioned to benefit in the recovery in drilling and completions activity from the unsustainably low levels experienced recently.
During the quarter, we transformed the company's balance sheet, and we have begun to see the benefits of our significant cost reduction efforts.
First, let me speak to the improvements made to our capital structure.
In the beginning of the quarter, we successfully completed a par for par exchange of the majority of our 2021 notes for new convertible notes, extending the maturity to 2025.
At the end of the third quarter, we had $129 million of liquidity.
This should be sufficient liquidity to fund operating cash needs for the foreseeable future, even in a robust market recovery.
Subsequent to the third quarter, we issued a call notice to redeem the remaining $13 million of 2021 notes.
When these notes are retired, the maturity of our ABL credit facility will extend to October 2022.
In addition, we announced a 1-for-20 reverse stock split, and we'll begin trading next Tuesday, November 10, at the new ratio and higher stock price.
We anticipate that the higher trading prices will bring Forum into compliance with the NYSE's trading requirements.
Second, I want to highlight the significant progress during the quarter in respect of cost reductions and the benefits we are seeing.
Since the beginning of 2019, we have reduced annualized cash costs by over $180 million, nearly 50%.
These reductions include $23 million in the third quarter alone.
Because of these cost reductions, EBITDA increased $2 million in the quarter despite a $10 million reduction in revenue.
While we are pleased with this success of these savings results, our expectations for only a modest market recovery compel us to take additional cost reduction actions in the fourth quarter.
We believe with our leaner cost structure following these reductions, we can achieve breakeven EBITDA at levels of industry activity of about 325 working rigs in the U.S.
This is a significant improvement from our historical breakeven level and lays a foundation for high earnings torque on activity, and Forum revenues ultimately increased.
In summary, Forum's transformed balance sheet provides a long runway for the company to benefit from a leaner cost structure when activity levels and market share gains lift Forum's revenue.
With that context, let me cover our results for the quarter.
Net loss for the quarter was $22 million, or $0.19 per diluted share.
Excluding a $29 million gain on extinguishment of debt, $12 million of special items and $3 million of foreign exchange losses, adjusted net loss was $0.30 per diluted share.
The special items resulted from ongoing cost reduction efforts and include impairments of certain operating leases and other assets as well as restructuring charges.
Our free cash flow after net capital expenditure in the third quarter was $6 million.
We benefited from the receipt of $14 million of tax loss carryback allowed under the CARES Act, which was partially offset by $9 million of cash interest paid in the quarter.
Proceeds from the disposition of certain capital assets, net of capital expenditures, generated $2 million of cash in the third quarter.
We expect asset dispositions to be a source of cash again in the fourth quarter, pending the completion of a few ongoing property sales.
Excluding the tax benefit, we generated $12 million from decreases in our net working capital and expect reduction of working capital to continue.
For the fourth quarter, we expect our free cash flow to once again exceed EBITDA.
Interest expense was $8 million in the third quarter, and depreciation and amortization and stock-based compensation were $12 million and $2 million, respectively.
We expect these expenses to remain at similar levels in the fourth quarter.
Adjusted corporate expenses were $5 million in the third quarter, and we expect them to be up modestly in the fourth quarter.
We continue to have some tax expense, despite an overall net loss, as we are not recognizing tax benefits in loss-making jurisdictions, but continue to recognize tax expense for some international jurisdictions with income.
Once we turn profitable in jurisdictions that are currently loss-making, we expect to have a relatively low tax rate as we begin to use our net operating losses.
The face of our balance sheet shows a $122 million sequential decrease in long-term debt, comprised of the full repayment of $85 million of ABL credit facility borrowings and a $37 million reduction related to our debt exchange.
The $37 million is comprised primarily of a $33 million debt discount and additional decreases related to debt issuance costs.
The debt discount reflects the fair value discount on the 2025 notes under the accounting rules for debt extinguishments where we recorded the new debt at an estimated 90% of par.
This discount and additional debt issuance costs will be amortized as additional non-cash interest expense over the life of the notes.
For clarity purposes, the difference between the $33 million debt discount and the $29 million gain on extinguishment of debt recorded in the income statement relates to $3.5 million of early participation payments made to bondholders during the debt exchange.
The 35% sequential decrease in drilling activity in the U.S. had a meaningful impact on our Drilling & Downhole segment as demand for drilling rig components and well construction casing hardware was significantly impacted.
However, we are already seeing green shoots of activity in these product offerings as drilling rig count has increased by about 50 rigs after bottoming in August.
Furthermore, in these product families, our Permian Basin sales teams are making strides to improve our market share, and we anticipate growing revenues going forward.
Our subsea product line continues to penetrate the defense industry and offshore wind development, which has helped sustain overall subsea revenues despite ongoing declines in the offshore oil and gas spending.
In the quarter, subsea revenues declined based on lower revenue recognized on the execution of existing backlog.
Our artificial lift products are a bright spot for the segment.
Demand for these products is more tied to well completion activity, and we saw a 30% increase in revenue for these products in the quarter.
The increase in U.S. well completion activity also benefited our Completions segment.
As our service company customers in pressure punting, wireline and coiled tubing services put their assets back to work, they increased spending on replacement and consumable items.
We saw a large increase in revenue for wireline products, in particular, our Enviro-Lite greaseless wireline cable which increases the efficiency of our customers' operations.
Demand for our stimulation products also increased in the quarter as customers replaced consumable items to put their fleets back to work.
Finally, in the Production segment, our valves product line continued to feel the negative impacts of slow underlying demand, compounded by reductions in inventory across distribution channels.
Orders in revenue in almost every part of the valves product line were negatively impacted.
We believe the distributor destocking to be transitory and that underlying activity in the midstream and downstream markets will ultimately increase just as we have seen completions and drilling activity increase.
That said, the valves business team took decisive action in the quarter to reduce costs and actually increased EBITDA in the quarter despite a meaningful decrease in revenue.
Revenues for our production equipment product line were down, primarily due to the slowdown in shipments to our customers in the Mid-Continent and Permian basins.
Orders, however, were up significantly in the product line as customers placed orders for future shipments in both oil and gas focused basins.
As we head into the final quarter of a difficult year, I want to recognize Forum's incredible employees.
The challenges we have experienced within our society, industry and company have been monumental.
The Forum team has responded with resolve, persistence and determination.
Looking back at the market during Q3, the trends between drilling and completion activities diverged a bit.
After bottoming during Q2, and frac activity in the U.S. has more than doubled.
While that increase was from a very low base, this contrasts with the U.S. drilling rig count, which bottomed halfway through the quarter but has increased far less from that point.
This divergence drove demand for completions-focused solutions while drilling and well construction products lag.
We saw the trend in Forum's bookings for products and solutions tied to well completions.
They significantly increased quarter-over-quarter.
This includes Enviro-Lite, our premium greaseless wireline cable, DURACOIL coiled tubing, and our natural gas production-focused GPU.
We expect to see further growth for these solutions in the fourth quarter, especially as customers bring equipment back into service.
Another product that witnessed increased demand in the quarter was SandGuard, our ESP sand management system SandGuard is part of our artificial lift offering, which is marketed as Forum Multilift Solutions.
This line offers sand management, gas mitigation and cable protection systems that extend the life of our customers' artificial lift program.
These solutions work on almost all types of artificial lift and are not tied to a certain brand of pump.
Also, a great characteristic of this line in that it is driven by production.
Demand comes from new completions and workovers.
In fact, about 50% of our sales go into older producing wells.
Forum Multilift Solutions generates strong results regardless of the level of drilling and completion activity.
Another trend we continue to monitor is the buildup of drilling and completion equipment in the Middle East and Asia.
This activity slowed a bit during Q3 due to COVID-19 travel restrictions.
However, we expect activity to recover in Q4 as national oil companies, the Big four service companies and local Middle East providers resume operations.
This will drive bookings and revenue for our premium drilling handling tools, mud pump consumables, blowout preventers and coiled tubing.
Shifting to the cost side, we have significantly reduced expenses across the board.
As Chris and Lyle have mentioned in their remarks, our cash costs have been reduced by nearly 50% since last year.
However, in an environment where U.S. drilling rig count is expected to average between 300 and 400 units next year, more costs need to be taken out of the business.
We are continuing to review our portfolio of products.
We have a number of products that generate substantial profit even at low levels of activity.
These products also deliver significant economic value to our customers, they are differentiated with limited competition, and they will grow strongly through the next cycle.
We will continue to invest in these products to develop new technology and to take additional market share.
Concurrently, given the expected level of activity next year, we will significantly reduce expenses for products that are not profitable with their current cost structures.
We have begun and will continue to simplify, consolidate and potentially exit certain of these products.
These actions are currently expected to be completed by early 2021 and will eliminate an additional $20 million to $30 million of annual expenses.
After these actions are complete, we will have significantly lowered our breakeven EBITDA and enhanced our operating leverage.
What a year 2020 has been for so many reasons.
Who could have predicted negative oil prices resulting in a sudden stoppage in oilfield activity, driving the rig count to record low levels?
But the worst is behind us from an oil and gas perspective.
Operators have begun to ramp up their drilling and completion activity so they can try to sustain their oil production levels.
Meanwhile, the U.S. gas market is looking better than it has in years.
At Forum, our new orders turned up in Q3 for the first time in several quarters.
This is the necessary precondition for our revenue to increase, which we expect to occur in Q4.
As activity levels begin to recover, Forum's results will show a direct improvement.
We expect our Q4 revenue to be at least as high as the $113 million generated in Q2, and we also expect our sequential incremental EBITDA margins to exceed 35%.
With the recent changes to our debt structure, we now have a sustainable financial position and the cash resources to fund our growth.
Our much more efficient cost structure means we will achieve an attractive earnings level at a much lower level of drilling and completion activity than in the past.
 Assistant:

Chosen response: q3 loss per share $0.19.


Prompt:
Human: We will also discuss certain non-GAAP financial measures.
Participants in today's call include our Executive Director, Chris Pappas; Acting Chief Executive Officer, Steve Strah; and Senior Vice President and Chief Financial Officer, Jon Taylor.
We also have several other executives available to join us for the Q&A session.
For those of you who do not know Chris, he has been an Independent Member of the FirstEnergy Board since 2011 and he retired in 2019 as President and Chief Executive Officer of Trinseo SA.
I appreciate the opportunity to participate in today's call.
I'm going to start out by discussing the leadership transition the company announced last week, my role with the company and the Board's governance efforts.
First, I will note that the DOJ investigation prompted a number of shareholder and customer lawsuits, and we are also responding to a subpoena we received from the SEC on September 2nd, related to the investigation in the FirstEnergy by the SEC division of enforcement.
We are cooperating with the DOJ and the SEC.
During the course of our internal review related to the ongoing government investigation regarding House Bill 6, the Independent Review Committee of the Board determined that three executives violated certain FirstEnergy Policies and its Code of Conduct.
When we determine that employee conduct is inconsistent with our policy and values, no matter how senior the individual, we have a duty to take action, and that is what we have done here.
As a result, FirstEnergy announced on Thursday that CEO Chuck Jones, along with Dennis Chack, Senior Vice President of Product Development, Marketing and Branding; and Mike Dowling, Senior Vice President of External Affairs, were all terminated effective immediately.
Concurrently, Steve Strah, who many of you know from his roles as FirstEnergy's President and previously CFO, was appointed acting CEO.
Steve has the experience, credibility and the support of the Board in this role.
Steve is a highly respected executive with deep knowledge of FirstEnergy's business and significant operational experience.
He became President in May 2020 as part of the company's ordinary course succession planning process.
In his various leadership roles at the company, including his recent tenure as CFO and President, Steve has supported the execution of FirstEnergy's long-term customer-focused growth strategy and demonstrated his commitment to delivering value to all stakeholders, including employees, customers, communities and shareholders.
I look forward to working closely with him in my new role as Executive Director.
In this role, I remain an Independent Member of the Board and will also work closely with Don Misheff, our non-Executive Chairman, to assist management team's execution of strategic initiatives, to engage with the company's external stakeholders, including the investment community as appropriate, and to support the development of enhanced controls and governance policies and procedures.
The Board is already conducting a full review of its governance and oversight processes to look for areas of improvement going forward.
This is a serious matter for our Board and for FirstEnergy Management.
In order to address this in a timely and effective way, the Board has formed a new subcommittee of our Audit Committee, to quickly assess and implement potential changes as appropriate in the company's compliance program.
This effort will be led by independent Board member, Leslie Turner.
Leslie retired as Senior Vice President, General Counsel and Corporate Secretary of The Hershey Company.
She joined our Board in 2018 and is a member of the Audit and Compensation Committees.
This new subcommittee will work with management, internal audit and also engage outside expertise for help and best practices.
As I previously mentioned, we have and will continue to cooperate with the DOJ and SEC investigations.
We have also reached out to company's key stakeholders, including the ratings agencies, banks, regulators, legislators and union leadership.
We believe the actions the Board has taken, represent an additional step toward addressing these matters and enable's FirstEnergy's management to continue to focus on running the business day to day.
FirstEnergy embarked on a strategy several years ago to become a fully regulated company and grow through the substantial opportunities available in both the distribution and transmission businesses.
That strategy will continue.
It is working and the foundational drivers are intact.
The FirstEnergy organization at large has been delivering excellent results over the last few years and that continues with the strong performance year-to-date and the company's expectations for the full year.
As we look ahead, the Board has full confidence in Steve and the rest of the team's ability to ensure a seamless transition and to continue to execute the company's strategy.
While I would have preferred to have assumed my new role under different circumstances, I agree with Chris that the actions taken by our Board of Directors last week, were absolutely necessary and are an additional step toward addressing this matter.
The management team is committed to working with the Board to assess and implement potential changes, as appropriate, with the company's compliance program.
We take this as a serious and important matter and we will begin to address this immediately.
In my 36 years with the company, we have faced challenges and changes, and we have always emerged stronger and even more dedicated to our mission.
Our management team remains focused on keeping each other safe, providing reliable service to our customers and executing our growth initiatives.
I am confident that we will continue to carry out this plan, finish the year strong and enter 2021 with momentum.
I look forward to working with our team to achieve this.
With that, let me transition to a brief update on our operations and recent regulatory activity, then Jon will review our results and other financial matters.
While the pandemic continues to impact our work protocols, our customers' lives, and the economy, I am extremely proud of the hard work and resiliencies our employees have demonstrated throughout this crisis.
We remain on pace to complete more than $3 billion in customer-focused investments across our system this year and our business model and rate structure continue to provide stability.
Those results primarily reflect the successful implementation of our regulated growth strategies and favorable weather, together with a continuation of the pandemic-driven load trends we noted on our second quarter call.
As Jon will discuss in more detail, the earnings impact of higher weather-adjusted sales from residential customers more than offset the lower usage in our commercial and industrial sectors.
Based on our strong performance year-to-date and the expectations for the next couple of months, we are affirming our guidance range of $2.40 to $2.60 per share, and currently expect to be near the top end of that range.
If decoupling is part of a House Bill 6 repeal, we would be closer to the $2.50 per share midpoint.
We have updated our funds from operations and free cash flow forecast for 2020, to reflect the impacts of higher storm costs of approximately $145 million and higher costs associated with the pandemic, including uncollectibles of approximately $120 million, most of which are deferred for future recovery.
Although the events of this past week and the government investigations create additional uncertainty, we are affirming our expected CAGR of 6% to 8% through 2021 and 5% to 7% extending through 2023, along with our plan to issue up to $600 million in equity annually in 2022 and 2023.
With that said, we are mindful that the current situation may present additional challenges to meet this objective.
Jon will address some tactics we are taking to address uncertainty created by the investigation.
Now, let's turn to regulatory matters.
In New Jersey, JCP&L filed an AMI implementation plan with the Board of Public Utilities in late August.
If approved, we would begin installing 1.15 million smart meters and related infrastructure across our New Jersey service territory, over a three-year period beginning in 2023.
Also, at JCP&L, last week, we were very pleased that the BPU approved our settlement in the distribution base rate case, as well as the sale of JCP&L's interest in the Yards Creek pumped storage hydro generation facility.
The settlement provides recovery for increasing costs associated with providing safe and reliable electric service for our JCP&L customers, along with the recovery of storm costs incurred over the past few years.
It includes a $94 million annual increase in distribution revenues, based on an ROE of 9.6%.
The settlement also includes an agreement to delay the implementation of the rate increase until November 1st, 2021, to assist our customers during the pandemic.
Prior to then, the rate increase will be offset through amortization of regulatory liabilities totaling approximately $86 million, beginning January 1st.
The parties also agreed that the net gains from the sale of JCP&L's interest in Yards Creek, estimated at $110 million, will be used to reduce the regulatory asset for previously deferred storm costs.
We expect to close the Yards Creek transaction within the next few months.
This includes transmission assets in the West Penn Power territory in Pennsylvania, the Mon Power territory in West Virginia and the Potomac Edison territory in West Virginia, Maryland and Virginia.
We are requesting an effective date of January 1, 2021.
In addition, we created a new stand-alone transmission company, Keystone Appalachian Transmission Company or KATCo, to accommodate the new construction in this footprint.
In closing, while I find it disappointing that we have arrived at this point, I have great confidence not only in the management team but in the full support of the Board of Directors; and together, we're committed to lead this company out of it.
I'd like to reiterate that our regulated growth strategy is strong.
It is working and it is moving forward, and I am committed to working with management and the Board to address changes to our compliance program.
As always, all reconciliations and other detailed information about the quarter can be found in the Strategic and Financial Highlights document on our website.
While we traditionally file the 10-Q in connection with our call, we don't expect to file it this week, as we continue our review and closing procedures to ensure we provide appropriate disclosure.
Also, as we noted in Friday's 8-K, the violations of certain company Policy and Code of Conduct by the terminated executives, has caused us to reevaluate our controls framework and that could lead to identifying one or more material weaknesses.
However, based on our review of these issues, we do not expect any impact to prior period financial results.
As Steve noted, operating earnings were a $0.01 above the top end of our earnings guidance range, largely reflecting the ongoing success of our regulated growth strategy, as well as benefits from weather.
In the distribution business, revenues increased compared to the third quarter of 2019, as a result of higher weather-adjusted residential usage and incremental rider revenue driven by our capital investment programs in Ohio and Pennsylvania.
Total distribution deliveries decreased compared to the third quarter of 2019, on both in actual and weather-adjusted basis.
Cooling degree days were approximately 21% above normal and relatively flat to the third quarter of 2019.
Total residential sales increased 5.3% on a weather-adjusted basis compared to the same period last year, as many people continued to work-from-home and spend more time at home due to the pandemic.
In the commercial customer class, sales decreased 5.5% on a weather-adjusted basis compared to the third quarter of 2019.
And in our industrial class, third quarter load decreased 6.3% compared to the same period last year.
Consistent with the trends we've seen for the past 12 months, the only sector showing growth in our footprint was shale gas.
As we discussed last quarter, the increased residential volumes more than offset the decrease in commercial industrial load from a revenue perspective.
In our transmission business, earnings were flat compared to the third quarter of 2019, as the earnings growth associated with our energizing the future transmission initiative were offset by higher net financing costs and the absence of a tax benefit recognized in the third quarter of 2019.
And in our corporate segment, our results primarily reflect higher tax benefits compared to the third quarter of 2019.
In the fourth quarter, we will make our annual pension and OPEB mark-to-market adjustment.
Based on the asset returns through September 30th and a discount rate ranging from 2.7% to 3%, we estimate that adjustment to be between an after-tax loss of $330 million to a gain of $40 million.
As a reminder, this is a non-cash item.
Year-to-date, our return on assets is 9.2% versus our assumption of 7.5% and our funded status remains at 77%.
As Chris mentioned, we proactively reached out to the three rating agencies last week to discuss within the leadership transition and our path forward.
While we believe the fundamentals of our business remain strong, we understand there are certain management and governance factors that the agencies consider in the risk assessment, which ultimately impact the credit ratings.
The rating agencies have taken numerous actions and we have provided all the details in the Investor Factbook.
FE Corp remains at investment grade with both Fitch and Moody's.
At S&P, while we are not investment grade at FE Corp or FirstEnergy Transmission, all other subsidiaries remain investment grade at their issue-level ratings.
We will continue to maintain our open dialog with each of the agencies and remain in close contact with them as we chart our path forward.
Finally, I'll take a few minutes to review other financial considerations and tactical changes we are making to address the uncertainty created by the investigations.
First, from a liquidity perspective, I'll remind you that we continue to have access to $3.5 billion of credit facilities committed through December 2022.
In addition, we expect our holding company debt to remain around 35% of total adjusted debt and we have no plans to increase debt at the FirstEnergy HoldCo.
To further refine expectations for 2021, I want to make a few comments about the dividend and reaffirm our dividend policy.
Two years ago, at EEI, we announced a targeted payout ratio of 55% to 65% of our operating earnings.
In alignment with that policy, our Board raised a quarterly payout by $0.02 per share for dividends paid in 2019 and then by $0.01 per share for those paid in 2020.
Given our current yield of approximately 5%, we expect to hold our quarterly dividend at $0.39 per share or $1.56 per share on an annualized basis for next year.
This would represent a 59% payout ratio to our CAGR midpoint for 2021.
The Board will continue to review the dividend on a quarterly basis.
From a tactical perspective, our 2021 base O&M is flat to 2020 levels, and we assume begin developing plans for reductions to operating expenses, if necessary.
With respect to our overall capital programs, for 2021, our capex programs will be at the $3 billion level and we will consider reductions if necessary.
Equity continues to be a part of our overall financing plan.
As Steve said, we are reaffirming our plan to issue up to $600 million in equity annually, in 2022 and 2023, and we will take the necessary actions financially to weather this uncertainty and put the company in the best position possible.
We believe these steps are prudent to provide flexibility as we face uncertainty in the near term.
I know you have many questions.
We are not going to provide more information at this time.
The Board and management view this as a serious and important matter, and our newly appointed subcommittee of the Audit Committee, led by Leslie Turner, as well as management and Internal Audit, will address this immediately.
FirstEnergy strategy is working and delivering results as shown in our third quarter 2020 results and our outlook going forward, but matters related to the investigation will add uncertainties to the future financial results of the company.
The tactical financial changes that Jon described earlier, are prudent to provide flexibility as we face uncertainty in the near term.
And now, we'll open to questions-and-answers.
 Assistant:

Chosen response:
sees fy 2020 non-gaap operating earnings per share $2.40 to $2.60.
remains on track to achieve 6% to 8% compound annual operating earnings growth from 2018 to 2021.


Prompt:
Human: We will also discuss certain non-GAAP financial measures.
Participants in today's call include our President and acting Chief Executive Officer, Steve Strah; Senior Vice President and Chief Financial Officer, Jon Taylor; and our Executive Director and independent Board member, Chris Pappas.
We also have several other executives available to join us for the Q&A session.
Before I get into our results, I wanted to kick off the call with a few words on a critical area of focus for FirstEnergy.
Taking appropriate actions to address our recent challenges and fostering a strong culture of compliance, ethics and integrity, we are deeply committed to creating a culture in which compliance is endemic in second nature and where our leaders prioritize and encourage open and transparent communications with all of our stakeholders.
This focus is absolutely essential for our success as an organization.
Our commitment starts at the top and extends throughout the organization.
We are working to ensure that every leader is actively engaged in setting the proper tone and creating an environment where not only our words, but our actions align with our core values and behaviors.
We're building a world-class compliance function to underpin this effort, including bringing on Hyun Park as our new Senior Vice President and Chief Legal Officer in January.
Hyun is the right person to step into this role at this time, and he will be instrumental in driving this cultural shift.
We will also be appointing a Chief Ethics and Compliance Officer, who will manage a dedicated team of compliance professionals and enhance our efforts to improve our compliance function by shifting from a decentralized to a more centralized model.
In addition, we'll be designating compliance ambassadors throughout the company to act as boots on the ground, ensuring the entire organization understands the critical importance of compliance and what it means for each individual.
We are also making significant changes in our approach to political and legislative engagement and advocacy.
Our activity in this space will be much more limited than it has been in the past, with closer alignment to our strategic goals and with additional oversight and significantly more robust disclosure.
With this additional transparency, my goal is to make it crystal clear exactly what efforts we support.
These efforts, together with enhanced policies and procedures, will help to bring additional clarity around appropriate behaviors at FirstEnergy.
And through enhanced communications, training, and most importantly, our actions, we are dedicated to reemphasizing that every employee at every level has the responsibility to consistently act in accordance with our core values and behaviors and to speak up if they see inappropriate behavior anywhere in the organization.
At the same time, we're taking decisive actions to rebuild our reputation and brand and focus on the future.
This includes the decisions recently made with respect to Ohio that I'll talk about shortly.
And while we don't control the time line related to the DOJ and SEC, we will continue to cooperate fully with these government investigations and remain focused on the matters that we can control.
But be assured that both management and the Board will be relentless and take the steps needed to position our company for long-term success.
Now turning to earnings.
Today, we reported 2020 GAAP earnings of $1.99 per share and operating earnings of $2.39 per share.
On Tuesday, we announced several proactive steps we're taking to resolve a range of regulatory proceedings affecting our Ohio utilities.
These include our previously announced agreement with the Ohio Attorney General, along with the decision not to seek recovery of lost distribution revenues.
This resulted in a charge of $0.15 per share in the fourth quarter.
Absent this charge, our 2020 operating earnings would have been $2.54 per share.
Well above the midpoint of our most recent guidance range and reflective of our strong performance last year.
While this was a difficult decision, we are confident it was the right decision.
We believe resolving these matters in a comprehensive manner is a critical step to demonstrate our commitment to transparency and integrity in every aspect of our business, while taking steps toward removing uncertainty relating to our current Ohio regulatory matters.
And in the interest of providing additional transparency, today's investor materials will include more information about regulatory ROEs in each of the states we serve.
We remain excited about the significant investment opportunities that will continue to drive solid earnings and growth in the years ahead.
When we have further clarity in Ohio, and with the ongoing government investigations, we intend to resume providing a long-term growth rate that should be consistent with traditional utility growth rates and similar to what we have provided in the past.
For now, we are focusing on this year and we have introduced 2021 operating earnings guidance of $2.40 to $2.60 per share.
Because we have a lot of ground to cover today, including: our solid operational performance last year, even in the face of the pandemic; our strategy for 2021 and beyond, including our commitment to building shareholder value; and the work we're doing to position the company for the future.
Our fundamental performance continues to be excellent.
We continued making demonstrable progress on our strategic goals, and we had an exceptional year from a safety perspective.
Even with about half of our employees working from home and the others adopting new health and safety protocols, the FirstEnergy team has remained laser focused on providing safe and reliable service to our six million customers.
I am deeply proud of the team's resilience and commitment, especially in light of the turbulence that marked the year.
Our results in 2020 reflect our commitment to strong operations as well as the stability provided by our diverse footprint and our wires-focused platform.
Last year, we also successfully executed our plan to invest $3 billion in our distribution and transmission systems as we continued our reliability in grid mod program to benefit customers.
We believe our robust long-term organic growth opportunities are well aligned with the focus on electrification and the critical role the grid plays in supporting the transition to a carbon-neutral economy.
These opportunities and our goals that support them are included in our strategic plan, published last month and available on our website.
I hope you have taken some time to review it.
This updated plan addresses our unwavering commitment to transparency and accountability and identifies old goals for key areas of our business.
These goals are aligned with our core values and behaviors, our regulatory strategy and our commitments to our customers, communities and investors as well as environmental stewardship.
Among these objectives outlined in the plan is our pledge to achieve carbon neutrality by 2050.
This ambitious goal reflects our transformation to a regulated electric utility and our responsibility to help create a sustainable energy future.
The strategic plan also addresses our continued commitment to build a more diverse and inclusive workplace.
We've had a D&I-focused KPI for three years now and we are taking even more aggressive steps to make progress in this area.
We're excited to pursue a 30% increase in our number of racially and ethnically underrepresented employees by 2025, both overall and at the supervisor and above level.
We believe this will help accelerate our transformation into an innovative, diverse and sustainable company and drive an important shift in our corporate culture.
We recently completed our fourth companywide survey of all employees.
Overall, I'm proud to say we scored relatively well on many fronts, but we certainly have more work to do.
One area identified for improvement is listening and valuing the opinions of our employees.
We want employees to feel empowered to voice their opinion on important issues and my team, with guidance and support from the Board of Directors, is addressing this head-on.
We view this work as central to strengthening our compliance program and a culture of ethics, integrity and accountability.
I'd like to explain my approach to driving this change, and perhaps we could use the company's safety culture as an analogy.
Several years ago, we had concerns that our safety culture was trending in the wrong direction.
Management led a significant effort with our employees to put in place new programs and training.
And to consistently demonstrate that safety is and will always be an unwavering core value.
These efforts ultimately instituted a cultural shift in how we all understood the critical importance of safety.
We want that very same cultural shift to occur as it relates to compliance and ethics.
As we look ahead, I feel confident in our path forward.
We have a strong foundation.
Our fundamentals are solid, and our strategies are proven.
And we are building on that with a relentless focus on making FirstEnergy a better company as we work to rebuild trust, work to achieve financial results and deliver for our customers and investors.
We recognize that changes won't happen overnight.
They happen over time, just like the evolution in our safety culture I spoke about earlier.
I'm confident we will emerge a stronger, better FirstEnergy.
First, I'd like to reiterate the Board's strong support of Steve and recognize the hard work he and the rest of the team are doing.
We commend their willingness to learn from the past and their absolute commitment to take this company forward on a new path, all while executing the company's strategy and keeping operations and financial results on solid footing.
The Board and management team are focused on a critical objective: to move forward from the past actions of certain former executives; and to take the steps necessary to improve the tone at the top, culture of ethics and integrity and the way we do business.
Steve talked about a lot of the important work that is being driven by the new management team.
Likewise, the Board is committed to strengthening every part of FirstEnergy's culture and taking the necessary steps to reestablish credibility.
Together, we have made much progress on the issues that confronted the company several months ago.
And at the same time, we recognize there is more work to do.
I'd like to recap some of the steps that the Board has been actively engaged in to drive improvements in our culture of compliance.
First, the Board promptly put in place an independent committee with external counsel to oversee the internal investigation and to monitor the status of the various regulatory and legal matters facing the company.
The independent committee, which currently is made up of the entire board, meets frequently and regularly.
The Board acted as swiftly in the removal of five executives, named Steve Strah as acting CEO, established an Executive Director role and expanded the role of the Board's share, all to assist management and the Board with the dynamics we faced in the first months of the investigation.
The Board unequivocally endorsed the principle of full cooperation with both the DOJ and the SEC on the matters related to the investigation.
And through our own internal investigation, led by independent counsel, has supported intensive analysis.
The Board established a compliance oversight subcommittee of the Audit Committee with independent counsel and leading compliance advisors to analyze and improve the compliance policy and culture at FirstEnergy.
Steve mentioned some initial output from this work earlier.
In addition, the Board established a number of working groups to oversee and support various work streams, including communications, recruiting and financial flexibility.
And to that point, management has initiated a project called FirstEnergy Forward, a transformational effort to change the way the company does business.
The objective of this project is to transform the company for the future, but it will also provide near-term financial flexibility.
Jon will discuss this later on the call.
We know there is particular interest in the status of the internal investigation.
Hopefully, my earlier comments give you a sense of the intensity and the magnitude of the work that has occurred within the company and with the benefit of extensive external independent support.
Our internal investigation continues to be thorough and robust.
And includes assistance from external law firms who are supported by several other consultants.
The ongoing investigation has not resulted in any new material items not previously disclosed.
In the course of the internal investigation, we did identify certain transactions, which, in some instances, extended back 10 years or more, including vendor services that were either improperly classified, misallocated to certain of utility or transmission companies or lacked proper supporting documentation.
These transactions result in amounts collected from customers that were immaterial to FirstEnergy, and our utility and transmission companies will be working with the appropriate regulatory agencies to address these amounts.
Our internal investigation will also continue to address any due developments in connection with the ongoing DOJ and SEC investigations.
More importantly, we are increasing our focus on another critical aspect of our work, moving FirstEnergy forward.
The fresh perspective of Hyun Park and a new Chief Ethics and Compliance Officer will be invaluable to creating an environment where the entire team is committed to embracing the right behaviors and embedding a strong culture of compliance.
He will also join the executive team on a transitional basis as Executive Director and act in advisory capacity to support efforts to achieve the company's priorities: restore its reputation and strengthen its overall governance and compliance functions.
John is a 40-year industry executive with extensive energy experience in navigating complex challenges and driving strong corporate governance.
Bringing John into this full-time role means that I will step back from the Executive Director position I've held since October and return to my regular duties as an independent Board member by April 1.
And importantly, we will continue to fully support the management team as it transitions FirstEnergy to the future as a more resilient company.
Despite the challenges the company has faced, FirstEnergy's operating fundamentals are strong, and we have a great platform of assets.
Together, we have put in place a robust plan to move forward and to position FirstEnergy as an industry leader.
One, we know it can be and one that will deliver excellent value to its customers and shareholders.
We look forward to working together alongside with management in this effort.
Today, I will review our financial results and expectations and provide an update on several other financial matters.
Our operating results include the charge at our Ohio utilities that Steve mentioned earlier.
Absent this charge, our results reflect continued rate base growth related to our transmission and distribution investment programs, a favorable mix of customer usage reflecting the impact of our residential customers staying at home and higher expenses mostly associated with the pandemic.
Additional fourth quarter data is available in the supporting materials on our website.
As Steve mentioned, we reported 2020 GAAP earnings of $1.99 per share and operating earnings of $2.39 per share, which compared to 2019 GAAP results of $1.70 per share and operating earnings of $2.55 per share.
In our distribution business, in addition to the $0.15 charge at our Ohio utilities, results for 2020 as compared to 2019 reflect the absence of Rider DMR in Ohio, which was in place for the first half of 2019 and higher operating costs.
These were partially offset by higher revenues from increased residential usage as well as earnings from our distribution enhancement programs.
Although total weather-adjusted sales decreased 2% in 2020, normal usage from our residential customers increased 5% for the year, which from an earnings perspective more than offset the 6% decrease in commercial and industrial loan.
While this shift has moderated as the pandemic wears on, we have seen higher weather-adjusted residential usage relative to our latest forecast in the 2% to 4% range with flat to slightly higher C&I usage.
In our transmission business, approximately $550 million in rate base growth drove stronger results, which were partially offset by higher financing costs, the impact of transmission rate true-ups and the absence of tax benefits recognized in 2019.
And finally, at our corporate segment, full year 2020 results primarily reflect higher corporate expenses, higher interest costs and a lower consolidated tax rate.
Today, we are providing 2021 operating earnings guidance of $2.40 to $2.60 per share and first quarter operating earnings guidance in the range of $0.62 to $0.72 per share.
Our expectations for the year include capital investments of up to $3 billion, with 100% of the $1.2 billion in transmission investment and approximately 40% of the $1.7 billion in distribution investment being recovered in a formula rate.
Our transmission plan includes continued expansion of our Energizing the Future program.
In December, FERC accepted our proposed tariff revisions for the transmission assets of West Penn Power, Mon Power, and Potomac Edison as well as the new Keystone Appalachian Transmission Company known as KATCo, pending the outcome of the settlement and hearing process.
Other key drivers for 2021 include the impact from the base distribution case at JCP&L, continued investment in our distribution enhancement programs and lower operating costs.
We expect these drivers to be partially offset by higher interest expense, which includes close to $0.04 per share associated with the step-up on $4 billion of holding company bonds, and $0.05 per share associated with our revolver borrowings that I'll address in a moment.
Additionally, our load forecast has a more typical usage profile for our residential customers and a slower recovery to pre pandemic levels for our C&I customers.
Equity remains a part of our overall financing plan, and we are affirming our plan to issue up to $600 million in equity annually in 2022 and 2023, and we will flex these plans as needed.
We remain committed to maintaining adequate liquidity for our distribution and transmission subsidiaries.
At year-end, our liquidity was approximately $3 billion, with $1.7 billion of cash on hand and $1.3 billion of undrawn capacity under our credit facilities.
We currently have $2.2 billion of short-term borrowings, of which approximately $2.1 billion was incurred in November as a proactive measure to increase our cash position to preserve financial flexibility.
And we have committed to our bank group that as we work through our financing plan, we expect to reduce short-term borrowings with the timing and amount dependent on a number of factors.
Our current maturities of long-term debt remain manageable with only $74 million maturing in 2021.
We remain in close contact with the rating agencies who are intensely focused on governance and the actions we are taking to strengthen our compliance environment and controls.
Improving our credit metrics at FirstEnergy, while committed -- committing to return to investment grade as quickly as possible and maintaining the strong credit ratings at our utilities are key priorities.
We are targeting future FFO to debt metrics in the 12% to 13% range at the consolidated level as we work to address some of the uncertainties that Chris and Steve mentioned.
We know how important the dividend continues to be for our investors in accordance with our target payout ratio of 55% to 65%.
The Board declared a quarterly dividend of $0.39 in December, payable March 1.
And as we mentioned on our third quarter call, our intent is to hold the 2021 dividend flat to the 2020 level of $1.56 per share, subject to ongoing Board review and approval.
The Board will obviously need to consider the entire landscape of the investigation process before each quarterly dividend is declared.
Finally, Chris mentioned that we've kicked off a project, FE Forward, that I see transforming FirstEnergy into a more efficient and effective industry leader, delivering superior customer value and shareholder returns.
In partnership with McKenzie, employees across FirstEnergy are challenging organizational traditions, conventional wisdom and cultural norms.
At the same time, we are focused on modernizing our management practices, processes and digital and technology platforms to deliver a superior customer experience and a much more nimble organization for the future.
While we view this as a transformational effort, we expect to naturally deliver efficiencies that will help us address whatever comes our way in the future, while meeting all of our regulatory commitments.
Beyond these benefits, we expect that this transformation will provide us the ability to reinvest in our business, our customers and our employees to become a better technology-enabled leader in the industry, committed to innovation, investments in emerging technologies and to support a smarter and cleaner electric grid.
While this project is not the only step in our journey, it's a critical one.
The eight-week information gathering phase of the project included intense and robust employee engagement to better understand how we work and how we can do it better through the use of more modern technology, digital and mobility tools and the use of data and analytics.
As we enter into the next phase of this effort, we will again engage employees throughout the company to review and assess each opportunity and build out the plans to transform FirstEnergy.
Over the next few months, we will build out specific actions for the future, which we look forward to sharing.
We received a letter dated February 16, 2021, from Icahn Capital, informing the company that Carl Icahn is making a filing under the Hart-Scott-Rodino Act and has an intention to acquire voting securities of FirstEnergy an amount exceeding $184 million, but less than $920 million, depending on various factors, including market conditions.
We do not know whether Carl Icahn and his affiliates have acquired shares of FirstEnergy common stock and/or derivatives, and we do not know his intentions with respect to our company.
The letter represents our only contact with Icahn Capital and we don't have any additional information to share.
 Assistant:

Chosen response:
affirmed its plan to issue up to $600 million in equity annually in 2022 and 2023.
sees fy 2021 non-gaap operating earnings per share $2.40 to $2.60.
sees q1 non-gaap operating earnings per share $0.62 to $0.72.


Prompt:
Human: We really appreciate you joining us on such a busy day.
You can find our earnings materials on our website at ir.
Additionally, you need to be aware that our comments will refer to adjusted, results which exclude the impact of notable items.
These are non-GAAP measures.
And last, but not least, you need to understand that our comments reflect our current views and that we aren't obligated to update them.
And with that, I'll hand things over to Bryan.
I'm pleased with the continued progress across our company this quarter and believe that our results demonstrate the benefit of our more diversified model.
Our attractive base of specialty businesses and higher growth markets are starting to drive our performance.
We delivered earnings per share of $0.50 a share and a return on tangible common equity of over 18% on an adjusted basis, despite the near-term headwinds that the industry is facing with continued pressure on short-term rates and strong competition given growing levels of excess liquidity and muted loan demand.
Given the continued improvement in the macroeconomic environment as markets reopen, I'm increasingly confident that our client-focused value proposition with a broad product set positions us well to be nimble and focus on the key segments where we can differentiate.
As a result, there were several bright spots in the quarter that I think are worthy of noting.
Our net interest income was down in the quarter given expected reductions in net merger-related and PPP portfolio benefits.
We generated core net interest income growth of 1% with underlying loan growth of 1%, which was driven by a commercial loan growth of 2%.
We continue to see momentum in our commercial pipelines and the quarter ended with unfunded commitments up 5% to just over $19 billion.
Our team remains strongly focused on serving clients and anticipating their needs to continue to deepen relationships across our expanded footprint.
Our net interest-bearing deposits declined 3 basis points -- our net interest deposit cost declined 3 basis points in the quarter.
The team is intensely focused on moving our costs toward peer median, and we think we are well positioned to hit the target sometime next year.
It's also important to note that we're well positioned to benefit in a rising rate environment and ended the quarter with interest rate sensitivity profile of a 16% increase in net interest income and a 100-basis point shock across the yield curve.
And while we expected total fees to be down given relatively healthy levels of fixed income and mortgage banking fees last quarter, we also saw a return to more normalized levels in traditional banking fees, which were up 2% in the quarter with particular strength in wealth on strong annuity sales.
Credit quality continues to be excellent with improvement in the overall quality of the loan portfolio highlighted by net charge offs of only 2 basis points and a 47% decrease in loan balances on deferral in the quarter.
That, coupled with improving macroeconomic environment, drove another robust reserve release with a provision credit of $85 million in the quarter.
This was a 26% decrease in the provision benefit this quarter versus last quarter.
Given the impact of CECL, as we look ahead, provision expense will likely be a headwind for us and the industry overall.
As our capital levels remain strong with a CET1 ratio of around 10.1%, we increased our capital return by nearly 60% in the quarter, repurchasing 9 million shares of common stock and ended the quarter with a tangible book value per share of $10.88.
And despite the difficult decision to delay the systems integration until February of next year, we continue to execute on the objectives of the MOE, with strong progress on integrating systems and aligning products and capabilities, including piloting a new digital platform for treasury services, launching new relationship and banker profitability tools, and completing the first round of banking center consolidations.
Given some higher cost tied to integration of our platforms along with higher costs due to markets reopening, much of which is marketing, as well as the seasonality and the idiosyncratic items, our expenses were up 3% in the quarter.
However, as Anthony will cover later, we expect expenses to moderate in the fourth quarter.
Alongside our integration efforts, we continue to invest in technology and people to drive revenue synergies and expense efficiencies, and thus far we've identified approximately $35 million in revenue synergies tied to the merger.
We remain confident in our ability to deliver at least $200 million in net annualized savings by the fourth quarter of next year.
As we begin to look ahead in the next year, I'm increasingly optimistic about the pace of the macroeconomic recovery as the world emerges from the pandemic and that the power of our combined organization will continue to be increasingly evident.
I'm very grateful for the dedication and hard work of our associates as they continue to work to deliver value for all of our constituents; clients, communities, and shareholders and help drive the momentum to achieve our long-term performance objectives.
And now, Anthony will run through the financial details.
Slide 6 provides the highlights of the quarter, most of which Bryan has already covered.
Overall we continue to make solid progress across the combined organization, and we're pleased to see evidence of the power of the MOE starting to emerge.
I'll briefly touch on slide 7 where we outline the notable items in the quarter which reduced our results by $51 million after-tax or $0.09 per share.
In addition to merger-related notable items of $44 million, we recorded $23 million of non-cash, pre-tax costs tied to retiring legacy IBERIABANK trust preferred securities in the quarter and expect to record an additional $3 million next quarter.
The redemptions will reduce interest expense by about $5 million annually with an expected payback of approximately five years.
Slide 8 provides an overview of our adjusted financials for the quarter.
We generated PPNR of $284 million as underlying improvement in core net interest income and traditional banking fees was masked by the impact of expected declines in net merger-related and PPP non net interest income along with lower fixed income and mortgage banking fees.
Adjusted expenses of $480 million moved higher largely reflecting idiosyncratic items tied to strategic investments and additional costs we incurred tied to markets reopening.
Given continued improvement in the macroenvironment, overall credit quality, and muted loan growth, we posted a credit to provision of $85 million, which was down from $115 million credit last quarter.
This reduction drove a $0.04 decline in EPS.
But overall, we continue to post healthy returns with an adjusted return on tangible common equity of 18.4% and 14% before the impact of the provision credit.
As Bryan mentioned, tangible book value per share came in at $10.88, up 1% as GAAP net income was largely offset by a $0.23 impact tied to the return of capital and a $0.07 decline tied to the mark-to-market on the security portfolio in OCI.
Moving to slide 9, net interest income was down $5 million linked quarter given the expected decrease tied to lower merger accretion and PPP portfolio balances, core net interest income was up 1% as the benefit of lower deposit cost, day count, commercial loan growth, and higher investment portfolio income was partially offset by continued declines in consumer loan balances and overall loan spread compression, given the continued reductions in LIBOR and the competitive landscape.
During the quarter, we ramped up our security purchases to put more excess cash to work and added around $400 million on a spot basis at a yield of around 1.5%.
As a result, our securities to interest-earning assets ended the quarter at 11%, up 1%.
Our current plan is to put a total of $1 billion of excess cash to work in securities by year-end, and we will continue to reevaluate opportunities to redeploy additional cash as we move forward.
Reported NIM was down 7 basis points linked quarter with core NIM down 8 basis points, driven by a 5 basis point impact tied to higher excess cash.
We ended the quarter with excess cash of $14 billion, up from $12.7 billion in the second quarter.
Core NIM was also lower given a 2 basis point reduction in interest recoveries on nonaccrual loans, as well as overall spread tightening with new origination spreads down around 15 basis points linked quarter, which collectively translated to about 3 basis points of pressure on the margin.
We also generated a 2 basis point benefit to the margin with further improvement in the deposit mix for the DDA and a decline in interest-bearing deposits.
I would also note that this quarter we added disclosure to the relationship of core net interest income to risk-weighted assets to help illustrate the impact of NII, excluding the excess cash position.
Under this view, you can see that year-over-year, the metric is down about 10 basis points compared to the core margin, which is down about 40 basis points.
And on slide 10, let's cover the puts and takes on fees.
Headline fees were down around 7% in the quarter.
This reflected anticipated declines in other non-interest income and fixed income and mortgage that were partially offset by growth in brokerage trust and insurance tied to higher annuity sales, as well as higher service charges and fees as an increase in transaction volume and higher leasing income tied to terminations helped to mitigate the impact of a recent change in our NSF pricing structure.
Fixed income average daily revenue came in at $1.3 million compared with $1.4 million last quarter.
Mortgage banking and title fees were down $4 million given continued spread tightening and our focus on driving more of our originations on balance sheet.
While overall originations were down 11% for the quarter, portfolio originations were up 5%.
The reduction in our other non-interest income was driven by an $11 million decrease in security gains tied to a legacy IBKC investment in the second quarter.
With regard to service charges, we recently began aligning key features across the legacy institutions approach to service charges, with the goal of simplifying and streamlining the experience for our clients.
The new program was launched in late August at First Horizon, with the remainder of the change occurring following the system conversions in February for our IBERIABANK franchise.
Over time, we expect the changes to reduce our overall NSF overdraft fees in the range of $9 million to $10 million annually, with changes going into production in August for First Horizon and with the February conversion for the IBERIABANK clients.
Adjusted expenses totaled $480 million, up $15 million in the quarter, largely because of seasonality and some idiosyncratic costs related to strategic investments and additional costs related to markets reopening, which was slightly offset by $1 million tied to incremental merger cost saves.
Personnel expense decreased $4 million linked quarter with salaries and benefits stable as a $4 million FICA credit helped mitigate the impact of day count, seasonally higher medical cost, and labor supply constraints.
Incentives and commissions remained relatively stable as a $3 million increase from pandemic-related vacation carryover partially offset lower revenue base payouts in fixed income and mortgage.
I should note that as we continue to shift more of our mortgage originations on balance sheet, you will see a reduction in mortgage fee income without a corresponding reduction in incentives.
Additionally, higher contractor cost tied to investments in new systems, largely in areas like treasury solutions and business banking online, as well as increased advertising spend given our reopening of markets, pushed outside services up $9 million.
And finally, other non-interest expense was up $11 million in the quarter driven by higher tax credit related contributions, a $2 million increase in fraud cost, and higher travel and entertainment costs also for markets reopening.
We are focused on driving efficiencies and identifying opportunities to redeploy expenses toward areas which provide higher growth for the organization, particularly post the systems conversions in February.
On slides 12 and 13, we cover our balance sheet profile.
Excluding PPP balances, which were down $1.8 billion in the quarter, average loans increased 1% in the quarter.
And as Bryan mentioned, this reflected commercial growth of 2%.
Our pricing strategies in the mortgage warehouse business helped deliver a 7% increase in balances with purchase volume up 3 percentage points linked quarter to 56%.
Additionally, we continue to see traction in other specialty businesses with growth in asset-based lending, equipment finance, and franchise finance, somewhat offset by reduction in commercial real estate, given higher levels of refinancing activity from the capital markets.
This is being somewhat offset by continued pressure in retail real estate secured refinancings, which drove a 1% decline in consumer loans, but we're reviewing opportunities to increase our recapture of these with refi opportunities.
Overall, we are pleased to see the path of the economic recovery and the increased activity levels across our footprint translate to this level of loan growth.
On the liability side, we saw a continued inflow of deposits, driven by a $1.1 billion average increase in DDA, or 4%, which helped to further improve the mix of deposits.
And with interest-bearing deposit costs down 3.3 basis points to 17 basis points for the quarter, our total funding costs improved 2 basis points.
As Bryan mentioned, we are intensely focused on driving our interest-bearing deposit costs down toward peer median levels.
On slide 14 and 15 we provide information on the asset quality and reserves where we continue to see exceptional low levels of charge-offs in non-performing loans and our allowance coverage of loans is healthy at 1.45% and 1.65%, excluding loans to mortgage companies and the PPP portfolio.
Additionally, when you consider the unrecognized discount on acquired loans, our total loss absorption is roughly 2%, which is very strong.
Turning to capital on slide 16.
Our CET1 ratio of 10.1%, down from 10.3% in the second quarter tied to the accelerated share repurchases in the quarter, loan growth, and higher unfunded commitments.
As Bryan mentioned, we returned $224 million in capital to common shareholders during the quarter, including $142 million, or 9 million shares of common stock repurchases.
Moving on to merger integration on slide 17.
While we had to delay the core systems conversions to early next year, we continue to make substantial progress across a number of fronts.
During the quarter, we completed a couple of conversion events and completed our wealth and trust and credit card conversions, finalized the mortgage system conversion, and launched a pilot of our new online banking platform for commercial customers.
We achieved $96 million in annualized run rate savings against our net target of $200 million.
Additionally, we continued making solid traction on revenue synergies and have thus far identified roughly $35 million of annualized revenue synergies that are tied to commercial loans and additional synergies tied to debt capital markets, mortgage, and private client wealth.
We are extremely focused on retaining and growing our client base by continuing to enhance or expand our set of products and services.
On slide 18, we provided our fourth quarter outlook.
We expect NII to be down at the high end of the low-single-digit range with average interest-earning assets and loans down modestly given the outlook for reduced merger accretion and PPP benefits and continued low rates.
We expect to continue to see modest loan growth, excluding PPP, and that we will see benefits as we continue to lower deposit costs.
At period end, we had a total of $2 billion in PPP loans, including $600 million related to Round 1 and total PPP fees of $45 million.
We expect the vast majority of the Round 1 portfolio to be forgiven by the end of the year and that the Round 2 will largely be forgiven by the third quarter of next year.
Regarding non-interest income, we expect fee income to be down in the high and the mid-to-high single-digit range with additional decreases tied to our NSF pricing changes and seasonally lower mortgage and wealth fees, as well as further moderation in fixed income.
We expect non-interest expense to decrease in the low-single-digit range with higher third quarter levels, which included investments, seasonality cost tied to markets reopening, and some idiosyncratic items.
And our outlook calls for charge-offs to be in the range of 5 to 15 basis points and that it's reasonable to see continued reserve outflows near term.
Finally, we expect our CET1 ratio to remain in the 9.5% to 10% range.
As Bryan mentioned, we feel good about our positioning and our ability to perform well given the current economic environment.
Finally, slide 19 includes our short- and long-term objectives.
We believe our more diversified model and highly attractive franchise will continue to deliver revenue synergies and loan growth.
Our MOE objectives to complete the systems integration and to identify other expenses to redeploy to higher-growth and higher-return opportunities will allow us to continue to support the dynamic digital needs of our clients and associates and drive continuous improvement in productivity and efficiency beyond the integration.
And as we continue to actively manage capital, our balance sheet, and credit quality performance position us well to continue to deliver attractive results near term and into the future.
And with that, I'll give the call back to Bryan.
I'm excited about the momentum in the results of the combined organization and what we've achieved this quarter.
The power of our attractive franchise, with the benefit of a more diversified business model in higher growth markets, is evident in our results.
The progress we have made toward our merger integration objectives continues to deliver revenue synergies, provide our clients with improved products and technology.
As the macroeconomic environment continues to improve, our capital structure and risk management infrastructure positions us to deliver higher growth and top-quartile returns into the future.
I am grateful again to our associates for their dedication toward building and strengthening client relationships and supporting our communities, and I am confident in our ability to become a top-performing regional bank and to drive enhanced shareholder value.
 Assistant:

Chosen response:
compname reports third quarter net income available to common shareholders of $224 million, or earnings per share of $0.41; $275 million, or $0.50, on an adjusted basis*.
q3 adjusted earnings per share $0.50.
qtrly net interest income of $492 million declined $5 million, or 1% from second quarter 2021.
expect to fully integrate systems in february 2022 given hurricane ida impact.
on track to deliver about $200 million of targeted annualized net cost saves by 4q22.
qtrly provision for credit losses was a benefit of $85 million.