DEF 14A 1 d615586ddef14a.htm DEF 14A DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

Filed by the Registrant  ☒

Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

Preliminary Proxy Statement

  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Material Pursuant to §240.14a-12

FirstEnergy Corp.

(Name of Registrant as Specified In Its Charter)

         

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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Message to Our Shareholders

  

 

LOGO

April 1, 2019

Dear Fellow Shareholders:

On behalf of the FirstEnergy Board of Directors and management, we thank you for your continued investment in FirstEnergy and for the confidence you have in your Board to oversee our shareholders’ interests in our business.

Last year in this letter, we talked about your Board’s composition, our commitment to ongoing shareholder outreach and engagement, and our strong corporate governance practices. We also talked about the implementation of our regulated strategy, which is designed to transform your Company into a high-performing, fully regulated utility with well-defined growth opportunities. Your Board and management remain highly engaged in this important work and are optimistic about the future.

In the accompanying proxy statement, we address the recent developments at your Company that demonstrate our ongoing commitment to strong corporate governance, including:

 

  ·  

Shareholder Outreach and Engagement

Your Board listens to our shareholders and considers their views when making decisions in the boardroom. We accomplish this primarily through a robust, year-round shareholder outreach and engagement program in partnership with your Company’s management. Please refer to page 4 of the accompanying proxy statement for a discussion of this program.

 

  ·  

Board Oversight of Corporate Responsibility

Our approach to environmental, social and governance (“ESG”) and sustainability is rooted in our mission statement, our core values and our behaviors. Our commitment extends beyond our products and services to include addressing economic, social, and environmental-related initiatives in our service area.

Recently, your Board’s Corporate Governance Committee enhanced its charter to include oversight of sustainability and corporate responsibility. Pursuant to its charter, the Committee reviews and provides guidance on your Company’s corporate citizenship practices, including sustainability, environmental and corporate responsibility initiatives. Please refer to page 2 of the accompanying proxy statement for a further discussion of your Board’s focus on this important area.

Further, the Compensation Committee has emphasized social responsibility at your Company, enhancing the safety-related incentive goals, reaffirming the environmental compliance goals, and introducing goals related to diversity and inclusion. As outlined in the executive compensation section of the attached proxy statement, a majority of our operational goals in the short-term incentive compensation program are linked to environmental, social and governance factors.

 

  ·  

Our Path Forward

Your Company is focused on completing its transformation into a premier, customer-focused, pure-play regulated utility. Your Board provides strategic oversight to help FirstEnergy implement its long-term, sustainable growth platform, fulfill its mission to make customers’ lives brighter, the environment better and communities stronger, and offer a competitive dividend to shareholders. Your Board continues to have strong confidence in our talented management team and the objectives to implement this regulated growth strategy, which is discussed further in our 2018 Annual Report to Shareholders.

We encourage you to read more about your Board, our corporate governance practices, and our executive compensation programs in the accompanying proxy statement. We are grateful for your support of your Company and your Board and thank you in advance for voting promptly.

 

Sincerely,     
    

LOGO

Charles E. Jones

President and Chief Executive Officer

    

LOGO

Donald T. Misheff

Board Chairman


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Notice of Annual Meeting of Shareholders

 

 

 

 

Date and Time

 

         

 

Location

 

         

 

Record Date

 

 

Tuesday, May 21, 2019

8:00 a.m. ET

    

 

John S. Knight Center

77 E. Mill Street

Akron, OH 44308

 

    

 

March 22, 2019

Agenda

 

   

Elect the 11 nominees named in the accompanying proxy statement to the Board of Directors to hold office until the 2020 Annual Meeting of Shareholders and until their successors shall have been elected;

 

   

Ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2019;

 

   

Approve, on an advisory basis, named executive officer compensation;

 

   

Approve a management proposal to amend the Company’s Amended Articles of Incorporation, as amended (the “Amended Articles of Incorporation”) and Amended Code of Regulations, as amended (the “Amended Code of Regulations”) to replace existing supermajority voting requirements with a majority voting power threshold;

 

   

Approve a management proposal to amend the Company’s Amended Articles of Incorporation and Amended Code of Regulations to implement majority voting for uncontested director elections;

 

   

Approve a management proposal to amend the Company’s Amended Code of Regulations to implement proxy access;

 

   

Vote on one shareholder proposal, if properly presented at the Annual Meeting; and

 

   

Take action on other business that may come properly before the Annual Meeting and any adjournment or postponement thereof.

Please carefully review this notice, the Company’s Annual Report to Shareholders for the year ended December 31, 2018 (the “2018 Annual Report”) and the accompanying proxy statement and vote your shares by following the instructions on your proxy card/voting instruction form or Notice of Internet Availability of Proxy Materials to ensure your representation at the Annual Meeting. Only shareholders of record as of the close of business on March 22, 2019, or their proxy holders, may vote at the Annual Meeting. If you plan to attend the Annual Meeting, you must register in advance. See the “Attending the Annual Meeting” section of the “Questions and Answers about the Annual Meeting” in the accompanying proxy statement for instructions on how to register.

 

LOGO   

On behalf of the Board of Directors,

 

  

LOGO

Ebony L. Yeboah-Amankwah

Vice President, Deputy General Counsel,

Corporate Secretary & Chief Ethics Officer

 

Akron, Ohio

This notice and accompanying proxy statement are being mailed or made available to shareholders on or about April 1, 2019.

 

 

Important Notice Regarding Availability of Proxy Materials

 

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders to be held on May 21, 2019. The accompanying proxy statement and the 2018 Annual Report are available at www.ReadMaterial.com/FE.

 

 

 

 

Important Note Regarding Voter Participation. Please take time to vote your shares!

 

 

Pursuant to applicable rules, if your shares are held in a broker account, you must provide your broker with voting instructions for all matters to be voted on at the Annual Meeting of Shareholders except for the ratification of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm. Your broker does not have the discretion to vote your shares on any other matters without specific instruction from you to do so.

 

 


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Table of Contents

 

 

 

  Proxy Statement Summary

 

  i

 

  Environmental, Social & Governance (“ESG”) Overview

 

  v

 

     

1

Corporate Governance & Board of Directors

 

  Corporate Governance and Board of Directors Information   1
 

Audit Committee Report

  10
  Matters Relating to the Independent Registered Public Accounting Firm   11
 

Director Compensation in Fiscal Year 2018

  12
  Director Qualifications   15
       

2

Items to Be Voted On

 

 

Biographical Information and Qualifications of Nominees for Election as Directors

  19
 

Items to Be Voted On

 

  25

 

     

3

Executive Compensation

  Executive Compensation   36
 

Compensation Committee Report

  36
 

Compensation Discussion and Analysis

  36
 

Executive Summary

  38
 

Compensation Tables

 

  70

 

     

4

Security Ownership & Other Important Matters

 

  Security Ownership of Management   90
  Security Ownership of Certain Beneficial Owners   91
  Compensation Committee Interlocks and Insider Participation   92
  Section 16(a) Beneficial Ownership Reporting Compliance   92
  Certain Relationships and Related Person Transactions   92
   

5

Questions and Answers About the Annual Meeting

 

 

Questions and Answers about the Annual Meeting

  94
 

Proxy Materials

  94
 

Voting Matters

  96
 

How You Can Vote

  98
 

Attending the Annual Meeting

  99
 

Shareholder Proposals for 2020

  101
 

Obtaining Additional Information

 

  101

 

  Appendices

 

 

 

Proposed Amendments to Amended Articles of Incorporation and Amended Code of Regulations Relating to the Replacement of Existing Supermajority Voting Requirements with a Majority Voting Power Threshold as Permitted under Ohio Law      A-1  
Proposed Amendments to Amended Articles of Incorporation and Amended Code of Regulations to Implement Majority Voting for Uncontested Director Elections      B-1  
Proposed Amendment to Amended Code of Regulations to Implement Proxy Access      C-1  


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     Proxy Statement Summary      

 

  

 

2019 Annual Meeting of Shareholders (the “Annual Meeting” or the “Meeting”)

 

 

 

   

Time and Date: 8:00 a.m., Eastern time, on Tuesday, May 21, 2019

 

   

Location: John S. Knight Center, 77 E. Mill Street, Akron, Ohio

 

   

Record Date: March 22, 2019

 

   

Voting: Shareholders of record of FirstEnergy Corp. (“FirstEnergy”, the “Company”, “we”, “us” or “our”) common stock as of the Record Date are entitled to receive the Notice of Annual Meeting of Shareholders and they or their proxy holders may vote their shares at the Annual Meeting.

 

   

Admission: If you plan to attend the Annual Meeting, you must register in advance. For instructions on how to register, see the “Attending the Annual Meeting” section of the “Questions and Answers about the Annual Meeting” below.

Voting Matters

 

 

 

 Item

 

1

 

 

Elect the 11 nominees named in this proxy statement to the Board of Directors. Refer to page 25 for more detail.

 

 

Your Board recommends you vote FOR this item.

 

 

Item

 

2

 

 

Ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2019. Refer to page 26 for more detail.

 

 

Your Board recommends you vote FOR this item.

 

     

 Item

 

3

 

 

Approve, on an advisory basis, named executive officer compensation. Refer to page 27 for more detail.

 

 

Your Board recommends you vote FOR this item.

 

Item

 

4

 

 

Approve a management proposal to implement a majority voting power threshold. Refer to page 28 for more detail.

 

 

Your Board recommends you vote FOR this item.

     

 Item

 

5

 

 

Approve a management proposal to implement majority voting for uncontested director elections. Refer to page 30 for more detail.

 

 

Your Board recommends you vote FOR this item.

 

Item

 

6

 

 

Approve a management proposal to implement proxy access. Refer to page 32 for more detail.

 

 

Your Board recommends you vote FOR this item.

     

 Item

 

7

 

 

Shareholder Proposal. Refer to page 34 for more detail.

 

 

X Your Board recommends you vote AGAINST this shareholder proposal.

   

 

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How to Cast Your Vote

 

 

Your vote is important! Even if you plan to attend our Annual Meeting in person, please cast your vote as soon as possible by:

 

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Do you hold shares directly with FirstEnergy or in the FirstEnergy Corp. Savings Plan?

 

Use the internet at
www.cesvote.com

 

 

Call toll-free at
1-888-693-8683

 

 

Mail by returning your proxy card/
voting instruction form(1)

 

 

Do you hold shares through a bank, broker or other institution (beneficial ownership)? (2)

 

Use the internet at
www.proxyvote.com

 

 

Call toll-free at
1-800-454-8683

 

 

Mail by returning your proxy card/
voting instruction form

 

(1) If your envelope is misplaced, send your proxy card to Corporate Election Services, Inc., your Company’s independent proxy tabulator and Inspector of Election. The address is FirstEnergy Corp., c/o Corporate Election Services, P.O. Box 3230, Pittsburgh, PA 15230.

(2) Not all beneficial owners may be able vote at the web address and phone number provided above. If your control number is not recognized, please refer to your voting instruction form for specific voting instructions.

Please follow the instructions provided on your proxy card/voting instruction form (the “proxy card”), Notice of Internet Availability of Proxy Materials, or electronic or other communications included with your proxy materials. Also refer to the “How You Can Vote” section of the “Questions and Answers about the Annual Meeting” on Page 98 for more details. All shareholders of record may vote in person at the annual meeting. Beneficial owners may vote in person at the meeting as described in response to Question 13 on page 98.

You may have multiple accounts and therefore receive more than one proxy card or voting instruction form and related materials. Please vote each proxy card and voting instruction form that you receive.

Board Nominees

 

 

The following table provides summary information about each member of your Board of Directors (your “Board”) standing for election to your Board. Each member stands for election annually.

 

                    Committee Memberships   Number
of Other
Public
Company
Boards
(2)

 

  Name

 

 

Age

 

   

Director

Since

 

   

Independent

 

 

Audit

 

 

Compensation

 

 

Corporate

Governance,

Sustainability

and Corporate

Responsibility

 

 

Finance(1)

 

 

Nuclear

 

  Michael J. Anderson

    67       2007     Yes       Chair       1

  Steven J. Demetriou

    60       2017     Yes             1

  Julia L. Johnson

    56       2011 (3)     Yes             3

  Charles E. Jones

    63       2015     No             0

  Donald T. Misheff

    62       2012     Yes             2

  Thomas N. Mitchell

    63       2016     Yes           Chair   0

  James F. O’Neil III

    60       2017     Yes   Chair           3

  Christopher D. Pappas

    63       2011 (3)     Yes     Chair         2

  Sandra Pianalto

    64       2018     Yes             3

  Luis A. Reyes

    67       2013     Yes             0

  Leslie M. Turner

    61       2018     Yes                   0

 

(1) 

Mr. Paul Addison is the Finance Committee Chair who will retire from your Board as of the 2019 Annual Meeting. It is anticipated that your Board will appoint a new Finance Committee Chair at its scheduled May Organizational meeting.

(2) 

As defined under New York Stock Exchange Listed Company Manual Section 303A Corporate Governance Standards Frequently Asked Questions.

(3) 

Ms. Johnson and Mr. Pappas were previously directors of Allegheny Energy Inc. (“Allegheny Energy”), which merged with your Company in 2011.

 

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As previously disclosed, Mr. Paul Addison and Dr. Jerry Sue Thornton will retire from your Board as of the 2019 Annual Meeting in accordance with the mandatory retirement age provisions of our Corporate Governance Policies and were not nominated by your Board for election at the Annual Meeting. The size of your Board, which is currently set at 13, will be reduced to 11 as of the Annual Meeting.

Key Facts About Your Board

 

 

We seek to maintain a well-rounded and diverse Board representing a wide breadth of experience and perspectives that balances the institutional knowledge of longer-tenured directors with the fresh perspectives brought by newer directors. Below are highlights regarding our 11 director nominees standing for election to your Board and our Board meetings held in 2018.

 

 

LOGO

Corporate Governance Highlights

 

 

Your Company is committed to strong corporate governance, which we believe is important to the success of our business and in advancing shareholder interests. Highlights include:

 

   
  Independent Oversight       Board & Committee Oversight

  Separate Board Chairman and Chief Executive Officer (our “CEO”)

  Independent Board Chairman

  All directors are independent, other than the CEO

  Board committees are comprised entirely of independent directors

  Independent directors regularly hold executive sessions without management at Board and committee meetings

   

  Enterprise risk oversight by full Board and its committees

  Corporate Governance, Sustainability and Corporate Responsibility Committee oversees corporate citizenship practices including environmental, social and governance (“ESG”) and sustainability initiatives

  Audit Committee oversees risks related to cybersecurity, among other matters including financial statements and compliance

  Compensation Committee ensures alignment between pay and performance

 

   
   
  Shareholder Rights & Accountability       Board Practices

  Annual election of all directors

  Shareholders of 25 percent or more shares outstanding and entitled to vote may call a special meeting

  Clear, effective process for shareholders to raise concerns to your Board

  Director Resignation Policy requiring any director nominee in an uncontested director election who receives a majority of withheld votes to tender his or her resignation

  Direct investor relations and governance engagement and outreach to shareholders

  Advisory vote on named executive officer compensation is held on an annual basis, consistent with the shareholder advisory vote on frequency

   

  Consideration of your Board’s ethnic and gender diversity, age, experience and skills and other attributes when evaluating nominees for your Board

  A robust annual evaluation process: full Board evaluation including third-party interviews, Board committee evaluations and individual director evaluations

  Mandatory director retirement age of 72 pursuant to our Corporate Governance Policies

  Policy to consider diversity for director candidates

  Goal to have at least 30% diverse members (by race, ethnicity and gender combined) for the foreseeable future

  Corporate Governance, Sustainability and Corporate Responsibility Committee and full Board engage in rigorous director succession planning

   

  Comprehensive director orientation and continuing education

  Robust stock ownership guidelines

  Anti-Hedging and Anti-Pledging Policies

  No poison pill

 

Our corporate governance practices are described in greater detail in the “Corporate Governance and Board of Directors Information” section beginning on page 1.

 

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Executive Compensation Highlights

 

 

Under our compensation design, the percentage of pay that is based on performance increases as executives’ responsibilities increase. As shown in the charts below, of base salary, STIP and LTIP, approximately 87% of the CEO’s total target pay and 75% of our NEO average target pay, other than Mr. Schneider, is variable and could be reduced to zero if performance metrics are not met.

 

CEO 2018 Pay Mix at Target    Other NEOs 2018 Pay Mix at Target    Mr. Schneider’s 2018 Pay Mix at Target

 

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We believe what we do and don’t do with respect to executive compensation aligns with the long-term interests of our shareholders and with commonly viewed best practices in the market.

 

   
What We Do    What We Don’t Do

 

  Pay-for-performance

 

  Caps on short-term and long-term incentive awards

 

  Non-overlapping financial performance measures in our short- and long-term incentive plans

 

  Robust stock ownership guidelines

 

  Clawback policy

 

  Mitigate undue risk in compensation programs

 

  Annual Say-on-Pay vote

 

  Double-trigger CIC provisions

 

  Independent compensation consultant for the Compensation Committee with only independent directors

 

  Beginning in 2018, LTIP is capped at 100% if absolute TSR over the LTIP performance period is negative

 

  

 

LOGO    No executive hedging or pledging allowed

 

LOGO    No employment agreements

 

LOGO    No tax gross-ups for our NEOs

 

LOGO    No repricing of underwater stock options without shareholder approval

 

LOGO    No excessive perquisites

 

LOGO    No payment of dividends on unearned shares

 

LOGO    No new entrants in the Supplemental Executive Retirement Plan (“SERP”) – SERP closed since 2014

Our executive compensation practices are described in greater detail in the “Executive Compensation” section beginning on page 36.

 

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     Environmental, Social & Governance (“ESG”) Overview      

 

 

Built upon the pillars of your Company’s Mission Statement, our ESG strategy to inform, engage and achieve results is rooted in strong corporate governance practices and policies. In 2018, FirstEnergy reinforced its focus on ESG efforts by enhancing the responsibilities of the Corporate Governance, Sustainability and Corporate Responsibility Committee, as well as forming a Sustainability Group in our Strategy Organization. In 2019, we’re focusing on additional initiatives to inform, engage and achieve our sustainability goals, and to demonstrate our commitment to delivering Energy for a Brighter Future to all of our stakeholders.  

 

LOGO

 

Inform

 

 

 

 

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We recognize it is vitally important to keep our stakeholders informed on corporate responsibility-related issues, including ESG activities and disclosures. We keep stakeholders informed about your Company’s efforts through key reports and disclosures, such as:

 

 

Climate Report: Energy for a Brighter Future

 

CDP (formerly Carbon Disclosure Project) Climate and CDP Water Reports

 

Edison Electric Institute (EEI) ESG/Sustainability Template

 

Corporate Responsibility Report Update Expected in 2019

 

Engage

 

 

 

 

LOGO

 

It is our responsibility to educate and engage stakeholders on corporate responsibility initiatives and achievements, including sustainability. Through our commitment in these areas, we have opportunities to reinforce the FirstEnergy brand and build our reputation as a good corporate citizen. This is accomplished through:

 

 

Internal efforts centered around the pillars of our Mission Statement (employees, customers, communities and the environment), including a program that tracks our employees’ volunteer efforts as well as a waste reduction initiative.

 

Further developing our relationships with external ESG/sustainability rating and reporting groups.

 

Achieve

 

 

 

 

LOGO

 

A key component of FirstEnergy’s success is our ability to measure the progress and impact of our efforts and initiatives through the development and tracking of internal and external goals as well as providing oversight and governance. Developing goals and tracking our progress toward achieving those goals demonstrates our commitment to corporate responsibility and our mission, including:

 

 

Continuing to make progress toward our goal of reducing carbon dioxide (CO2) emissions companywide by at least 90 percent below 2005 levels by 2045. Through 2018, we have achieved 62 percent of that goal, primarily due to plant retirements and asset sales.

 

Incentivized our workforce to achieve ESG related goals. Many of the operational goals in our short-term incentive compensation programs are linked to ESG factors, for example:

   

Enhanced safety related goals in the short-term incentive program in 2018 by incorporating Days Away Restricted or Transferred (“DART”) Rate and Life Changing Events (“LCEs”), while also maintaining Occupational Safety and Health Administration (“OSHA”) reportable incidents as a metric.

   

Diversity & Inclusion (“D&I”) goals in the short-term incentive program in 2018 focus on diverse succession planning, diverse professional hiring, and improvement on inclusion as measured through a survey score.

   

Our Operations Index in the short-term incentive program continues to focus on quality customer service and reliability, first call resolution and environmental excursions.

 

Ensuring Strong ESG Related Corporate Governance Practices and Policies

 

 

 

LOGO

 

A key driver and component of our success is a strong foundation of Corporate Governance practices and policies that promotes transparency, accountability and engagement exemplified by your Board. As further discussed earlier in the Proxy Statement Summary and in the Corporate Governance and Board of Directors Information section your Board has:

 

 

Since 2014, elected seven new directors, six of whom are standing for re-election at the Annual Meeting, and continued to increase your Board’s ethnic and gender diversity.

 

Added responsibilities to the Corporate Governance, Sustainability and Corporate Responsibility Committee to reflect efforts on sustainability and corporate responsibility, specifically including ESG topics.

 

Ensured risk oversight is conducted by the full Board and its committees.

 

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Note About Forward-Looking Statements

 

 

Forward-Looking Statements: This proxy statement includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 based on information currently available. Unless the context requires otherwise, as used herein, references to “we,” “us,” “our,” and “FirstEnergy” refer to FirstEnergy Corp. Forward-looking statements are subject to certain risks and uncertainties and readers are cautioned not to place undue reliance on these forward-looking statements. These statements include declarations regarding management’s intents, beliefs and current expectations, and typically contain, but are not limited to, the terms “anticipate,” “potential,” “expect,” “forecast,” “target,” “will,” “intend,” “believe,” “project,” “estimate,” “plan” and similar words. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, which may include the following: the ability to successfully execute an exit from commodity-based generation; the risks associated with the Chapter 11 bankruptcy proceedings involving FirstEnergy Solutions Corp. (FES), its subsidiaries, and FirstEnergy Nuclear Operating Company (FENOC) (FES Bankruptcy) that could adversely affect FirstEnergy, FirstEnergy’s liquidity or results of operations, including, without limitation, that conditions to our settlement agreement with respect to the FES Bankruptcy settlement agreement may not be met or that such settlement agreement may not be otherwise consummated, and if so, the potential for litigation and payment demands against us by FES, FENOC or their creditors; the ability to accomplish or realize anticipated benefits from strategic and financial goals, including, but not limited to, our strategy to operate and grow as a fully regulated business, to execute our transmission and distribution investment plans, to continue to reduce costs through FE Tomorrow, which is the FirstEnergy initiative launched in late 2016 to identify our optimal organization structure and properly align corporate costs and systems to efficiently support FirstEnergy as a fully regulated company going forward, and other initiatives, and to improve our credit metrics, strengthen our balance sheet and grow earnings; legislative and regulatory developments at the federal and state levels, including, but not limited to, matters related to rates, compliance and enforcement activity; economic and weather conditions affecting future operating results, such as significant weather events and other natural disasters, and associated regulatory events or actions; changes in assumptions regarding economic conditions within our territories, the reliability of our transmission and distribution system, or the availability of capital or other resources supporting identified transmission and distribution investment opportunities; changes in customers’ demand for power, including, but not limited to, the impact of state and federal energy efficiency and peak demand reduction mandates; changes in national and regional economic conditions affecting us and/or our major industrial and commercial customers or others with which we do business; the risks associated with cyber-attacks and other disruptions to our information technology system that may compromise our operations, and data security breaches of sensitive data, intellectual property and proprietary or personally identifiable information; the ability to comply with applicable state and federal reliability standards and energy efficiency and peak demand reduction mandates; changes to federal and state environmental laws and regulations, including, but not limited to, those related to climate change; changing market conditions affecting the measurement of certain liabilities and the value of assets held in our pension trusts and other trust funds, or causing us to make additional contributions sooner, or in amounts that are larger, than currently anticipated; the risks associated with the decommissioning of the retired nuclear facility owned by FirstEnergy subsidiaries; the risks and uncertainties associated with litigation, arbitration, mediation and like proceedings; labor disruptions by the unionized workforce of FirstEnergy subsidiaries; changes to significant accounting policies; any changes in tax laws or regulations, including the Tax Cuts and Jobs Act, adopted December 22, 2017, or adverse tax audit results or rulings; the ability to access the public securities and other capital and credit markets in accordance with our financial plans, the cost of such capital and overall condition of the capital and credit markets affecting us; actions that may be taken by credit rating agencies that could negatively affect either our access to or terms of financing or our financial condition and liquidity; and the risks and other factors discussed from time to time in FirstEnergy’s Securities and Exchange Commission (SEC) filings. Dividends declared from time to time on FirstEnergy’s common stock, and thereby on FirstEnergy’s preferred stock, during any period may in the aggregate vary from prior periods due to circumstances considered by FirstEnergy’s Board of Directors at the time of the actual declarations. A security rating is not a recommendation to buy or hold securities and is subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. These forward-looking statements are also qualified by, and should be read together with, the risk factors included in FirstEnergy’s SEC filings with the SEC, including but not limited to the most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q, together with any subsequent Current Reports on Form 8-K. The foregoing review of factors also should not be construed as exhaustive. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements. We expressly disclaim any obligation to update or revise, except as required by law, any forward-looking statements contained herein as a result of new information, future events or otherwise.

 

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LOGO

 

Corporate Governance and Board of Directors Information

 

 

Board Leadership Structure

The positions of CEO and Chairman of the Board are separated. Our Amended Code of Regulations and Corporate Governance Policies do not require that your Chairman of the Board and CEO positions be separate, and your Board has not adopted a specific policy or philosophy on whether the role of the CEO and Chairman of the Board should remain separate. However, having a separate Chairman of the Board and CEO has typically allowed your CEO to focus more time on our day-to-day operations and, in your Board’s judgement, is appropriate at this time.

Your Board schedules regular executive sessions for your independent directors to meet without management participation. Because an independent director is required to preside over each such executive session of independent directors, we believe it is more efficient and appropriate to have your independent Chairman of the Board preside over all such meetings.

Board Composition and Refreshment

Your Board is comprised of individuals who are highly-qualified, diverse, and independent (other than Mr. Jones, who is not considered independent because of employment with your Company). Your Board’s succession planning takes into account the importance of Board refreshment and having an appropriate balance of experience and perspectives on your Board. As further discussed in the “Director Qualifications” section of this proxy statement, your Board and the Corporate Governance, Sustainability and Corporate Responsibility Committee recognizes that the racial, ethnic and gender diversity of your Board, as well as diversity of thought, background and experiences, are an important part of its analysis as to whether your Board possesses a variety of complementary skills and experiences. Accordingly, your Board has set a goal that it will be composed of at least 30% diverse members (by race, ethnicity and gender combined) for the foreseeable future.

We have regularly added directors who we believe infuse diversity, new ideas and fresh perspectives into the boardroom. Since the beginning of 2014, your Board has added seven new Board members, six of which are currently standing for election as director nominees. The result is more than half of your Board’s director nominees have tenure of five years or less. During this time, your Board added three directors, two of which are currently standing for election, that further diversified your Board. Also, in connection with our mandatory retirement age of 72 for outside directors described below, our longest tenured director will retire from your Board as of the Annual Meeting.

Board Oversight

Risk Management

Your Company faces a variety of risks and recognizes that the effective management of those risks contributes to the overall success of your Company. Your Company has implemented a process to identify, prioritize, report, monitor, manage, and mitigate its significant risks. A management Risk Policy Committee, consisting of the Chief Risk Officer and senior executive officers, provides oversight and monitoring to ensure that appropriate risk policies are established and carried out and processes are executed in accordance with selected limits and approval levels. Other management committees exist to address topical risk issues. Timely reports on significant risk issues are provided as appropriate to employees, management, senior executive officers, respective Board committees, and the full Board. The Chief Risk Officer also prepares enterprise-wide risk management reports that are presented to the Audit Committee, the Finance Committee and your Board.

Your Board administers its risk oversight function through the full Board, as well as through the various Board committees. Specifically, your Board considers risks applicable to your Company at each meeting in connection with its consideration of significant business and financial developments of your Company. Also, the Audit Committee Charter requires the Audit Committee to oversee, assess, discuss, and generally review your Company’s policies with respect to the assessment and management of risks, including risks related to the financial statements and financial reporting process of the Company, credit risk, liquidity and commodity market risks, and risks related to cybersecurity. The Audit Committee also reviews and discusses with management the steps taken to monitor, control, and mitigate such exposures. Through this oversight process, your Board obtains an understanding of significant risk issues on a timely basis, including the risks inherent in your Company’s strategy. In addition, while your Company’s Chief Risk Officer

 

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administratively reports to your Chief Financial Officer (your “CFO”), he also has full access to the Audit Committee and Finance Committee and is scheduled to attend each of their committee meetings.

In addition to the Audit Committee’s role in risk oversight, our other Board committees also play a role in risk oversight within each of their areas of responsibility. Specifically, the Compensation Committee reviews, discusses, and assesses risks related to compensation programs, including incentive compensation and equity-based plans, as well as the relationship between our risk management policies and practices and compensation. See also, “Risk Assessment of Compensation Programs” found in the “Compensation Discussion and Analysis” (the “CD&A”) section in this proxy statement. The Corporate Governance, Sustainability and Corporate Responsibility Committee considers risks related to corporate governance, including Board and committee membership, Board effectiveness, and related person transactions. The Finance Committee evaluates risks relating to financial resources and strategies, including capital structure policies, financial forecasts, budgets and financial transactions, commitments, expenditures, long and short-term debt levels, dividend policy, issuance of securities, exposure to fluctuation in interest rates, share repurchase programs and other financial matters deemed appropriate by your Board. The Nuclear Committee considers the risks associated with the safety, reliability, and quality of certain nuclear operations. Further, day-to-day risk oversight is conducted by our Corporate Risk department and our senior management and is shared with your Board or Board committees, as appropriate. We believe that your Board’s role in risk oversight is consistent with and complemented by your Board’s leadership structure. In addition, the section in this proxy statement entitled “Board Leadership Structure” provides information relating to our separation of the Chairman of the Board and CEO positions.

Cybersecurity

FirstEnergy is committed to protecting its employees, customers, facilities, and the ongoing reliability of its electric system. We work closely with state and federal agencies and our peers in the electric utility industry to identify physical and cyber security risks, exchange information, and put safeguards in place to comply with strict reliability and security standards. From a security standpoint, no other industry – including gas pipelines – is as heavily regulated as the electric utility sector. We have comprehensive cyber and physical security plans in place, but we don’t publicly disclose details about these measures that could aid those who want to harm our customers and our employees.

Your Board has identified cybersecurity as a key enterprise risk. As a result, the Audit Committee reviews our cybersecurity risk management practices and performance, primarily through reports provided by management. The Audit Committee also reviews and discusses with management the steps taken to monitor, control, and mitigate such exposure. Your Board and certain committees receive cybersecurity updates from the Chief Information Officer at least once a year, and more frequently as needed. Among other things, these reports have focused on incident response management and recent cyber risk and cybersecurity developments.

Security enhancements are also a key component of FirstEnergy’s Energizing the Future transmission investment program. Since 2014, your Company has invested heavily in layered security measures that use both technology and hard defenses to protect critical transmission facilities and our digital communications networks.

Corporate Responsibility

Corporate responsibility is a core value of your Company. Your Company is focused on delivering strong financial results and providing top-tier reliability to our customers, but we are also committed to doing so in a way that respects the communities and environments in which we operate.

We continue to reaffirm our focus on corporate responsibility issues as they relate to our business strategy, reputation and key stakeholders. For example, in 2018, the Corporate Governance Committee was renamed the Corporate Governance, Sustainability and Corporate Responsibility Committee and related responsibilities were added to the committee’s charter regarding corporate responsibility.

Public Policy and Engagement

We have a decision-making and oversight processes in place for political contributions and expenditures. Our Corporate Political Activity Policy available on our website describes the criteria for certain political contributions and ballot initiative expenditures and the process for approving such contributions and expenditures. Also, your Board’s Corporate Governance, Sustainability and Corporate Responsibility Committee periodically reviews this policy and related practices as well as dues and/or contributions to industry groups and trade associations.

 

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Based on feedback from our shareholder engagement and outreach, we recently expanded our website disclosure to include reports on federal and state level lobbying, as well as, the lobbying portion of certain trade association dues.

Evaluating Board Effectiveness

Your Board is committed to a rigorous evaluation process. Through this evaluation, your Board’s performance is reviewed, including areas where your Board feels it functions effectively and areas where your Board believes it can improve. For 2018 your Board had an annual evaluation process, as further described below, that is coordinated by the Corporate Governance, Sustainability and Corporate Responsibility Committee: a full Board evaluation that included third-party interviews; committee evaluations; and individual director evaluations.

 

1      Annual Process
is Initiated
  u   

Your Board’s Corporate Governance, Sustainability and Corporate Responsibility Committee initiates the annual Board, committee and individual director evaluation process and presents the proposed approach to your Board for comment.

 

         
2      Board & Committee
Assessment
Surveys
  u   

Assessment surveys solicit each independent director’s opinion regarding your Board’s and committees’ effectiveness relating to topics such as Board and committee composition and operations, peer director evaluations, strategic direction, shareholder value and executive management.

 

         
3     

 

Third Party
Director
Interviews

 

  u    Your Board has engaged a third party to conduct interviews with our directors. Interviews include follow-up conversations regarding answers to Board and Committee assessment surveys.
         
4      Individual Director
Evaluations
& Director
Self-Assessments
  u   

Your Board Chairman, in consultation with the Chair of the Corporate Governance, Sustainability and Corporate Responsibility Committee, reviews individual performance and qualifications of each director. In addition, prior to accepting a nomination, each director conducts a self-assessment as to whether he or she satisfies the criteria set forth in the Company’s Corporate Governance Policies and the Corporate Governance, Sustainability and Corporate Responsibility Committee Charter.

 

         
5      Presentation
of Findings
  u   

Your Corporate Governance, Sustainability and Corporate Responsibility Committee presents its findings to your Board, assessing the contributions of your Board and its committees and discussing any areas in which your Board believes improvement is recommended. Input about the findings is sought from your Board.

 

         
6      Feedback
Incorporated
  u   

Results requiring consideration are addressed at subsequent Board and committee meetings and reported back to the full Board, where appropriate. For example, in 2018, feedback included indications that your Board should stay focused on Board composition and diversity, and remain focused on cybersecurity and your Company’s strategic initiatives.

 

 

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Your Board and each committee evaluation includes comprehensive questions designed to provide a wholistic evaluation of the performance of your Board and each committee in light of our current needs. In 2018, your Board also engaged an independent third-party to conduct one-on-one interviews with directors to obtain feedback and assessments. Also, individual director performance evaluations are tailored to each member by your Board’s Chairman, in consultation with the Chair of the Corporate Governance, Sustainability and Corporate Responsibility Committee, in order to consider and review the individual director’s performance and continued qualifications. The 2018 evaluations were shared as needed with the applicable directors, committee members, and your full Board, and led to discussions to determine which areas your Board would like to focus on during 2019 to enhance its effectiveness.

Shareholder Outreach and Engagement Program

We Have a Robust Shareholder Outreach and Engagement Program

We believe it is important for us to engage regularly with our shareholders so we maintain an active shareholder outreach and engagement program. With support from your Board, your Company’s CEO and the management team, including members of the Corporate Secretary’s office and departments of Investor Relations, Human Resources and Sustainability, focus significant efforts on engaging our major shareholders and the broader investment community. Shareholder feedback and suggestions we receive are reported to the Compensation Committee, Corporate Governance, Sustainability and Corporate Responsibility Committee or your entire Board for its consideration. We also conduct ongoing governance reviews (e.g., assessing governance trends). This process ensures that your Board and management understand and consider the topics that matter most to our shareholders so we can address them effectively.

 

 

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Outreach and Engagement Program Shareholder Feedback

As part of our commitment to continue to understand our investors’ perspectives through and as part of our corporate governance shareholder engagement program, during 2018, our engagement efforts primarily focused on discussion of governance-related issues, executive compensation and ESG matters. During these meetings, participants included members from management and your Board, where appropriate. Our outreach gave us an opportunity to discuss our continuing goal of implementing ESG and executive compensation measures that are in the best interest of our shareholders and our commitment to continue to align pay and performance.

 

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Based on the results of our Outreach and Engagement efforts, your Board has taken the following steps:

 

   

Adopted Changes to our Executive Compensation Program: Incorporating the feedback we received from shareholders, your Compensation Committee implemented several changes to our executive compensation program in 2018. For further insight on our outreach related to executive compensation, see the “Shareholder Engagement and Say-on-Pay Results” section below in the CD&A.

 

   

Enhanced our Environmental Related Disclosures: We regularly evaluate our risk and related disclosures, recently we have published a climate report and anticipate updating our Corporate Responsibility Report in 2019.

 

   

Enhanced our Proxy Statement Disclosures: We continue to enhance our disclosures throughout this proxy statement regarding Board composition and director skills. We also expanded the use of charts and illustrations in this proxy statement to help better explain our corporate governance and executive compensation programs and objectives.

 

   

Included Certain Governance-Related Management Proposals in this Proxy Statement: Your Board is once again seeking shareholder approval of the following three management proposals to: replace existing supermajority voting requirements with a majority voting power threshold (Item 4), implement majority voting for uncontested director elections (Item 5) and implement proxy access (Item 6). Despite a significant effort in an attempt to secure the required shareholder support, it has been unsuccessful and this is the fourth time in recent years your Board is attempting to secure shareholder support on the subjects of simple majority vote and proxy access, and the third time in recent years for the proposal related to a majority vote in uncontested director elections. Your Board cannot unilaterally adopt the proposed amendments because a shareholder vote is necessary under our governing documents.

 

   

Emphasized our focus on corporate responsibility: Your Board also added responsibilities to the Corporate Governance, Sustainability and Corporate Responsibility Committee to reflect the committee’s focus on environmental and corporate responsibility issues, and similarly re-named it in order to reflect these important additions.

Communications with your Board of Directors

Your Board provides a process for shareholders and interested parties to send communications to your Board and non-management directors, including our Chairman of the Board. As set forth in your Company’s Corporate Governance Policies, shareholders and interested parties may send written communications to your Board or a specified individual director, including our Chairman of the Board, by mailing any such communications to the FirstEnergy Board of Directors at your Company’s principal executive office, c/o Corporate Secretary, FirstEnergy Corp., 76 South Main Street, Akron, OH 44308-1890. Our Corporate Governance Policies can be viewed by visiting our website at www.firstenergycorp.com/charters.

The Corporate Secretary or a member of her staff reviews all such communications promptly and relays them directly to a Board member or a specified individual director, provided that such communications: (i) bear relevance to your Company and the interests of the shareholder, (ii) are capable of being implemented by your Board, (iii) do not contain any obscene or offensive remarks, (iv) are of a reasonable length, and (v) are not from a shareholder who already has sent two such communications to your Board in the last year. Your Board may modify procedures for sorting shareholders’ and interested parties’ communications or adopt any additional procedures, provided they are approved by a majority of the independent directors.

Other Governance Practices and Policies

Attendance at Board Meetings, Committee Meetings and the Annual Meeting of Shareholders

Our Corporate Governance Policies provide that directors are expected to attend all scheduled Board and applicable committee meetings and your Company’s annual meetings of shareholders. Your Board held 12 meetings during 2018. All directors attended at least 75 percent of the meetings of your Board and of the committees on which they served. Also, 13 out of 14 of our directors who were directors at the time of the 2018 year’s Annual Meeting attended the 2018 annual meeting. During 2018, Board members also participated in site visits to your Company’s operating locations.

 

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Non-management directors, who are all independent directors, are required to meet as a group in executive sessions without the CEO or any other non-independent director or management at least six times in each calendar year, and our independent Chairman of the Board presided over all executive sessions. During 2018, the non-management directors met 10 times in executive sessions.

Codes of Business Conduct

Your Company’s Code of Business Conduct applies to all employees, including the CEO, CFO and Chief Accounting Officer. In addition, your Board has implemented a separate Director Code of Ethics and Business Conduct. Both codes can be viewed on our website at www.firstenergycorp.com/charters. Any substantive amendments to, or waivers of, the provisions of these documents will be disclosed and made available on our website, as permitted by the SEC and as disclosed in our most recent Annual Report. Both codes are available, without charge, upon written request to the Corporate Secretary, FirstEnergy Corp., 76 South Main Street, Akron, Ohio 44308-1890 or may be viewed on our website at www.firstenergycorp.com/charters.

Corporate Governance Documents

Your Board believes that your Company’s policies and practices should enhance your Board’s ability to represent your interests as shareholders. Your Board established Corporate Governance Policies which, together with Board committee charters, serve as a framework for meeting your Board’s duties and responsibilities with respect to the governance of your Company. Our Corporate Governance Policies and Board committee charters can be viewed by visiting our website at www.firstenergycorp.com/charters. Any amendments to these documents will promptly be made available on our website.

Director Orientation and Continuing Education

Your Board recognizes the importance of its members to keep current on Company, industry and governance issues and their responsibilities as directors. All new directors participate in orientation soon after being elected to your Board. Also, your Board makes available and encourages continuing education programs for Board members, which include internal strategy meetings, third-party presentations and externally offered programs.

Other Public Company Board Membership

Our Corporate Governance Policies provide that directors will not, without your Board’s approval, serve on the board of directors of more than three other public companies. Further, without your Board’s approval, no director who serves as an executive officer of any public company may serve on a total of more than two public company boards of directors.

 

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Committees of your Board

Your Board established the standing committees listed below. All committees are comprised solely of independent directors as determined by your Board in accordance with our Corporate Governance Policies, which incorporate the New York Stock Exchange (“NYSE”) listing standards and applicable Securities and Exchange Commission (“SEC”) rules. All members of the Audit Committee, Compensation Committee and the Corporate Governance, Sustainability and Corporate Responsibility Committee are independent based on the definition applicable to such committee in the NYSE listing standards and SEC rules. Mr. Jones, your only director who is not considered independent because of his employment with your Company, does not serve on any Board committee.

 

  Audit Committee

 

 

    8 meetings in fiscal year 2018        
   

    James F. O’Neil III (Chair) *

 

    Paul T. Addison *

 

    Donald T. Misheff *

 

    Leslie M. Turner

 

    * Financial Experts

   

The Audit Committee is primarily responsible for assisting your Board with oversight of the integrity of the Company’s:

 

•  financial statements;

•  compliance with legal, risk management and regulatory requirements;

•  independent auditor’s qualifications and independence;

•  performance of the Company’s internal audit function and independent auditor;

•  systems of internal control with respect to the accuracy of financial records, adherence to Company policies and compliance with legal and regulatory requirements; and

•  oversee major financial risk exposures, including risks related to cybersecurity.

 

The Audit Committee is also directly responsible for the appointment, compensation and retention of, and the oversight of the work and pre-approval of all services provided by your Company’s independent registered public accounting firm. For a complete list of responsibilities and other information, please refer to the Audit Committee Charter available on our website at www.firstenergycorp.com/charters.

Your Board appoints at least one member of the Audit Committee who, in your Board’s business judgment, is an “Audit Committee Financial Expert,” as such term is defined by the SEC. Your Board determined that Messrs. Addison, Misheff and O’Neil meet this definition. All members of the Audit Committee are financially literate. As required by the applicable NYSE listing standards, to the extent any member of your Company’s Audit Committee simultaneously serves on the audit committee of more than three public companies, your Company will disclose on its website (www.firstenergycorp.com under the tab “Investors”, “Corporate Governance” and “Board of Directors”) your Board’s determination whether such simultaneous service impairs the ability of that individual to serve effectively on your Company’s Audit Committee. See the Audit Committee Report in this proxy statement beginning on page 10 for additional information regarding the Audit Committee.

Mr. O’Neil was appointed as chair of the Audit Committee in May 2018. Ms. Turner was appointed to the Audit Committee in September 2018. Mr. Addison will retire from your Board at the Annual Meeting in May 2019 in accordance with your Board’s mandatory retirement age and therefore will no longer serve on the Audit Committee.

 

 

 

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  Compensation Committee

 

 

    5 meetings in fiscal year 2018        
   

    Christopher D.

    Pappas (Chair)

 

    Steven J. Demetriou

 

    Sandra Pianalto

 

    Dr. Jerry Sue Thornton

 

    Leslie M. Turner

   

The Compensation Committee is primarily responsible for:

 

•  discharging the responsibilities of your Board relating to compensation of certain executive officers of your Company, including our CEO;

•  endorsing a compensation philosophy and objectives that support competitive pay for performance and are consistent with our corporate strategy;

•  establishing the appropriate incentive compensation and equity-based plans for our senior-level officers;

•  producing the Compensation Committee Report to be included in your Company’s Annual Report on Form 10-K and this proxy statement; and

•  reviewing and discussing with our management the disclosures in the Compensation Discussion and Analysis below and making a recommend to your Board whether these disclosures should be included in your Company’s Annual Report on Form 10-K and this proxy statement.

 

The Compensation Committee also reviews and, if appropriate, makes recommendations to your Board regarding the compensation and benefits of our non-employee directors. To the extent permitted under NYSE listing standards and applicable law, the Compensation Committee is authorized to delegate to one or more subcommittees. For information regarding the role of executive officers and our independent compensation consultant in determining or recommending the amount or form of executive and director compensation, see the Compensation Discussion and Analysis (“CD&A”) section below. For a complete list of responsibilities and other information, refer to the Compensation Committee Charter available on our website at www.firstenergycorp.com/charters.

Mr. Misheff transitioned off the Compensation Committee in May 2018 and Ms. Turner was appointed to the Compensation Committee in September 2018. Dr. Thornton will retire from your Board in May 2019 in accordance with your Board’s mandatory retirement age and therefore will no longer serve on the Compensation Committee.

 

 

 

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  Corporate Governance, Sustainability and Corporate   Responsibility Committee

 

 

  5 meetings in fiscal year 2018        
     

    Michael J. Anderson

    (Chair)

 

    Julia L. Johnson

 

    Donald T. Misheff

 

    Thomas N. Mitchell

 

    Luis A. Reyes

   

The Corporate Governance, Sustainability and Corporate Responsibility Committee is primarily responsible for:

 

•  Board succession, including ensuring the appropriate balance of diversity of attributes, experience, skills, ethnicity and gender of our directors;

•  recommending Director nominees (also refer to the “Director Qualifications” section below for more details); and

•  developing and periodically reviewing our corporate governance policies.

 

The Committee is also directly responsible for oversight of our (i) political activities and practices and (ii) our corporate citizenship practices, including sustainability, environmental and corporate social responsibility initiatives. For a complete list of responsibilities and other information, refer to the Corporate Governance, Sustainability and Corporate Responsibility Committee Charter available on our website at www.firstenergycorp.com/charters.

Mr. Misheff was appointed to the Corporate Governance, Sustainability and Corporate Responsibility Committee in May 2018.

 

 

 

  Finance Committee

 

 

  6 meetings in fiscal year 2018        
   

    Paul T. Addison

    (Chair)

 

    Michael J. Anderson

 

    Steven J. Demetriou

 

    Christopher D. Pappas

 

    Sandra Pianalto

 

    Dr. Jerry Sue Thornton

   

The Finance Committee is primarily responsible for monitoring and overseeing your Company’s financial resources and strategies, with emphasis on those issues that are long-term in nature. For a complete list of responsibilities and other information, refer to the Finance Committee Charter available on website at www.firstenergycorp.com/charters.

 

Dr. Thornton and Mr. Addison will retire from your Board in May 2019 in accordance with your Board’s mandatory retirement age and therefore will no longer serve on the Finance Committee. It is anticipated that your Board will appoint a new Finance Committee Chair at its scheduled May organizational meeting.

 

 

 

  Nuclear Committee

 

 

  5 meetings in fiscal year 2018        
   

    Thomas N. Mitchell

    (Chair)

 

    Julia L. Johnson

 

    James F. O’Neil III

 

    Luis A. Reyes

    The Nuclear Committee is primarily responsible for monitoring the activities of the nuclear units owned by FirstEnergy Nuclear Generation, LLC, during the period of restructuring through its conclusion as those units progress through their restructuring, decommissioning or sale, and also to monitor and oversee the retired nuclear unit owned by GPU Nuclear, Inc. For a complete list of responsibilities and other information, refer to the Nuclear Committee Charter available on our website at www.firstenergycorp.com/charters.

 

 

 

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Audit Committee Report

 

 

The Audit Committee of your Board is charged with assisting your full Board in fulfilling its oversight responsibility with respect to the quality and integrity of the accounting, auditing, and financial reporting practices of your Company. The Audit Committee acts under a written charter that is reviewed annually, revised as necessary, and is approved by your Board. The charter specifies that the Audit Committee is directly responsible for the appointment, compensation and retention of, and the oversight of the work and pre-approval of all services provided by your Company’s independent registered public accounting firm, which was PricewaterhouseCoopers LLP during 2018. In connection with the Audit Committee’s approval of any non-audit services, the Audit Committee considers whether the independent registered public accounting firm’s performance of any non-audit services is compatible with the independent auditor’s independence.

As part of the Audit Committee’s auditor engagement process, the Audit Committee considers whether to rotate the independent registered public accounting firm. The Audit Committee also participates in the selection of and ensures the regular rotation of the lead audit partner and concurring partner of the Company’s independent registered public accounting firm every five years. PricewaterhouseCoopers LLP has been the Company’s independent auditor since 2002. The Audit Committee currently believes that there are benefits to having an independent auditor with an extensive history with the Company. The benefits include: quality audit work and accounting advice due to PricewaterhouseCoopers LLP’s institutional knowledge of our business and operations, accounting policies and financial systems, and internal control framework; knowledge of the utility industry; and operational efficiencies and a resulting lower fee structure because of PricewaterhouseCoopers LLP’s history and familiarity with our business.

In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed with management the audited financial statements included in your Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In performing its review, the Audit Committee discussed the propriety of the application of accounting principles by your Company, the reasonableness of significant judgments and estimates used in the preparation of the financial statements, and the clarity of disclosures in the financial statements.

The Audit Committee reviewed and discussed with your Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, their opinion on the conformity of the audited financial statements with accounting principles generally accepted in the United States. This discussion covered the matters required by Auditing Standard No. 1301, “Communications with Audit Committees,” as adopted by the Public Company Accounting Oversight Board, including its judgments as to the propriety of the application of accounting principles by your Company.

The Audit Committee received the written disclosures and the letter from the independent registered public accounting firm regarding their independence from your Company as required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence and discussed with the independent registered public accounting firm such firm’s independence.

The Audit Committee discussed with your Company’s internal auditors and independent registered public accounting firm the overall scope, plans, and results of their respective audits. The Audit Committee met with the internal auditors and independent registered public accounting firm, with and without management present, to discuss the results of their examinations, their evaluations of your Company’s internal controls, and the overall quality of your Company’s financial reporting process.

Based on the above reviews and discussions, the Audit Committee recommended to your Board that the audited financial statements be included in your Company’s Annual Report on Form 10-K for the year ended December 31, 2018, for filing with the SEC.

Audit Committee Members: James F. O’Neil III (chair), Paul T. Addison, Donald T. Misheff and Leslie M. Turner.

 

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Matters Relating to the

Independent Registered Public Accounting Firm

 

 

Audit Fees

The following is a summary of the fees paid by your Company to its independent registered public accounting firm, PricewaterhouseCoopers LLP, for services provided to your Company and its reporting subsidiaries during the years 2018 and 2017.

PricewaterhouseCoopers LLP billed your Company an aggregate of $7,634,500 in 2018 and $9,001,500 in 2017 in fees for professional services rendered for the audit of your Company’s annual financial statements and the review of the financial statements included in each of your Company’s Quarterly Reports on Form 10-Q, services that are normally provided in connection with statutory and regulatory filings or engagements, audit-related services and non-audit-related services as noted below.

 

     Fees for Audit Year 2018       Fees for Audit Year 2017    
 

Audit Fees(1)

      $7,345,000         $8,460,000    
 

Audit Related Fees(2)

      $163,200         $502,000  
 

Tax Fees(3)

      $120,000         - 0 -  
 

All Other Fees(4)

            $6,300         $39,500  
 

Total

      $7,634,500         $9,001,500  

 

(1)

Professional services rendered for the audits of your Company’s and certain of its subsidiaries’ annual financial statements and reviews of unaudited financial statements included in your Company’s and its SEC reporting subsidiary’s (in 2017) Quarterly Reports on Form 10-Q and for services in connection with statutory and regulatory filings or engagements, including comfort letters, agreed upon procedures and consents for financings and filings made with the SEC. 2017 audit fees include approximately $1.6 million in audit fees for FES’ audit in 2017.

(2)

Professional services rendered in 2018 related primarily to the attestation of the Penn Power Company’s Net Earnings certificate and professional services rendered in 2017 related primarily to SEC Regulation AB and restructuring.

(3)

Professional services rendered in connection with the Foreign Investment in Real Property Tax Act.

(4)

Non-audit-related software subscription fees to PricewaterhouseCoopers LLP.

The Audit Committee has considered whether any non-audit services rendered by the independent registered public accounting firm are compatible with maintaining its independence. The Audit Committee, in accordance with its charter and in compliance with all applicable legal and regulatory requirements promulgated from time to time by the NYSE and SEC, has a policy under which the independent registered public accounting firm cannot be engaged to perform non-audit services that are prohibited by these requirements. The charter further states that any engagement of the independent registered public accounting firm to perform other audit-related or any non-audit services must have approval in advance by the Chair of the Audit Committee upon the recommendation of the Vice President, Controller and Chief Accounting Officer. Such approved engagement is then presented to the Audit Committee at its next regularly scheduled meeting. All audit and non-audit services provided by PricewaterhouseCoopers LLP in 2018 and 2017 were pre-approved.

 

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Director Compensation in Fiscal Year 2018

 

 

 

Name(1)

 

 

Fees Earned

or Paid

in Cash ($)(2)

 

 

Stock
Awards
($)(3)

 

 

Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings ($)(4)

 

 

All Other
Compensation
($)(5)

 

 

Total

($)

 

         

Paul T. Addison

  $110,000   $134,898   $3,569   $0   $248,467
         

Michael J. Anderson

  $110,000   $134,898   $2,303   $7,000   $254,201
         

William T. Cottle(6)

  $35,495   $50,417   $15,284   $0   $101,196
         

Steven J. Demetriou

  $95,000   $134,898   $0   $0   $229,898
         

Julia L. Johnson

  $95,000   $134,898   $0   $0   $229,898
         

Donald T. Misheff

  $196,580   $134,898   $0   $0   $331,478
         

Thomas N. Mitchell

  $112,823   $134,898   $681   $0   $248,402
         

James F. O’Neil III

  $110,582   $134,898   $0   $0   $245,480
         

Christopher D. Pappas

  $110,000   $134,898   $0   $2,500   $247,398
         

Sandra Pianalto(7)

  $81,806   $116,134   $0   $0   $197,940
         

Luis A. Reyes

  $97,979   $134,898   $0   $0   $232,877
         

George M. Smart(6)

  $91,332   $50,417   $17,444   $16,755   $175,948
         

Dr. Jerry Sue Thornton

  $94,928   $134,898   $0   $5,000   $234,826
         

Leslie M. Turner(8)

  $26,848   $38,090   $0   $0   $64,938

 

(1)

Charles E. Jones, President and CEO, is not included in this table because during 2018 he was an employee of your Company and therefore received no compensation for his service as director. The compensation received by Mr. Jones is shown in the 2018 Summary Compensation Table (“SCT”) below.

(2)

The amounts set forth in the Fees Earned or Paid in Cash column consists of fees earned in cash whether paid in cash, deferred into the FirstEnergy Corp. Deferred Compensation Plan for Outside Directors (“DDCP”) or elected to be received in stock.

(3)

The amounts set forth in the Stock Awards column represents the equity retainer received under the FirstEnergy Corp. 2015 Incentive Compensation Plan (“2015 Incentive Plan”) in the form of shares of common stock. Each amount constitutes the aggregate grant date fair value of stock awards for fiscal 2018 calculated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718. The equity retainer is typically paid in quarterly installments. The fair value on the grant dates for each director listed in the table was $33,742 on February 26, 2018; $33,725 on April 26, 2018; $33,714 on August 6, 2018; and $33,717 on October 30, 2018. Share amounts are rounded down. There were no option awards or stock awards outstanding as of December 31, 2018.

(4)

The amounts set forth in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column reflect only the above-market earnings on nonqualified deferred compensation. There are no pension values for directors. The formula used to determine the above market earnings equals 2018 total interest multiplied by the difference between 120 percent of the Applicable Federal Rate for long-term rates (AFR) and the plan rate and divided by the plan rate.

(5)

The amounts set forth in the All Other Compensation column include compensation not required to be included in any other column. Charitable matching contributions made on behalf of our directors represent the entire amount in the column, other than for Mr. Smart. Charitable matching contributions were $7,000 ($2,000 of which was a 2017 match processed in 2018) for Mr. Anderson, $2,500 for Mr. Pappas and $5,000 for Dr. Thornton. Personal use of corporate aircraft was $14,142 for Mr. Smart. Gifts were $2,613 for Mr. Smart. The FirstEnergy Foundation supports the charitable matching contributions under its Matching Gifts Program.

(6)

Messrs. Cottle and Smart retired effective May 15, 2018.

(7)

Ms. Pianalto was elected to your Board effective February 20, 2018. The amounts paid to Ms. Pianalto for 2018 were prorated based on her election date.

(8)

Ms. Turner was elected to your Board effective September 19, 2018. The amounts paid to Ms. Turner for 2018 were prorated based on her election date.

 

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Compensation of Directors

We use a combination of cash and equity-based incentive compensation in order to attract and retain qualified candidates to serve on your Board. Equity compensation provides incentives to directors linking their personal interests to our long-term financial success and to increases in shareholder value. In setting director compensation, we take into consideration the significant amount of time that directors spend in fulfilling their duties to us as well as the skill level required of members of your Board. Only non-employee directors receive the compensation described below for their service on your Board. Since Mr. Jones was an employee, he was not eligible to receive compensation for his service on your Board in 2018.

Fee Structure

In 2018, each non-employee director received a cash retainer of $95,000 and an equity retainer valued at approximately $135,000 and paid in the form of our common stock. The Chairs of the Corporate Governance, Sustainability and Corporate Responsibility, Compensation, Finance, and Nuclear Committees each received an additional $15,000 cash retainer in 2018 for serving as a committee chairperson, and the Chair of the Audit Committee received an additional $20,000 cash retainer in 2018. The amounts paid to directors for 2018 were prorated accordingly based on the duration of their service. Directors are also paid meeting fees of $1,500, but only for in-person committee meetings and/or site visits held off-cycle. Mr. Misheff, the non-executive Chairman of the Board, received an additional $94,162 cash retainer prorated in 2018 for serving in that capacity beginning in May 2018. Mr. Smart, who retired as non-executive Chairman of the Board received an additional $55,838 cash retainer in 2018 for serving in the capacity until his retirement in May 2018. Ms. Turner currently directs the Company to pay her cash retainer to her wholly owned limited liability company, and as such, her cash retainer is not eligible for deferral as described below. Effective January 1, 2019, the cash and equity retainers were increased to $100,000 and $150,000 respectively; the cash retainer for the Chair of the Audit Committee was increased to $25,000; the cash retainer for the Chair of the Compensation Committee was increased to $20,000; and individual meeting fees were eliminated.

Equity and cash retainers and chairperson retainers were paid in quarterly installments. Any equity compensation and any compensation deferred into equity was granted under the 2015 Incentive Plan. Directors are responsible for paying all taxes associated with cash and equity retainers. We do not gross up equity grants to directors to cover tax obligations.

We believe it is critical that the interests of directors and shareholders be clearly aligned. As such, similar to the NEOs identified in the CD&A, directors are also subject to share ownership guidelines. Within 90 days of their election to your Board, a director must beneficially own a minimum of 100 shares of our common stock. Within five years of joining your Board, each director is required to own shares of our common stock with an aggregate value of at least six times the annual cash retainer (currently $570,000 in common stock). Each director has either attained the required share ownership guideline or is expected to attain the required share ownership guideline within the allotted amount of time. The share ownership guidelines are reviewed by the Compensation Committee for competitiveness on an annual basis and were last reviewed at the Compensation Committee’s July 2018 meeting.

For 2018, the following directly and indirectly held shares were included in determining whether a non-employee director met his/her ownership guidelines:

 

   

Shares directly or jointly owned in certificate form or in a stock investment plan;

 

   

Shares held individually or jointly by a broker, or, in certain circumstances, held in trust, or in an individual retirement account (“IRA”), shares held by a spouse, or other beneficially owned shares, to the extent known by the Company; and

 

   

All units held in the DDCP, discussed below, and units held in the Allegheny Energy, Inc. Non-Employee Director Stock Plan (“AYE Director’s Plan”) or the Allegheny Energy Inc. Amended and Restated Revised Plan for Deferral of Compensation of Directors (“AYE DCD”), which units are payable in shares.

 

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Deferred Compensation Plan for Outside Directors

The DDCP is a nonqualified deferred compensation plan that provides directors the opportunity to defer compensation. Directors may defer up to 100 percent of their cash retainer into cash or stock accounts. Deferrals into the cash account can be invested in one of nine funds, similar to the investment funds available to all of our employees through the FirstEnergy Corp. Savings Plan, or in a Company-paid annually adjusted fixed income account. The Company paid interest at an annual rate of 7.13% on funds deferred into cash accounts prior to 2013 and 5.13% on funds deferred into cash accounts beginning in 2013. The interest rate received by the directors is the same rate received by the NEOs under the FirstEnergy Corp. Amended and Restated Executive Deferred Compensation Plan (“EDCP”). In 2018, the Compensation Committee approved a third amendment to the DDCP in order to comply with Department of Labor (DOL) regulations under the Employment Retirement Income Security Act (ERISA), which amends the claims procedure requirements for disability benefits.

For stock accounts, dividend equivalent units are accrued quarterly and applied to the directors’ accounts on each dividend payment date using the closing price of our common stock on that date. Payments made with respect to any dividend equivalent units that accrue after January 21, 2014, will be paid in cash.

Other Payments or Benefits Received by Directors

The corporate aircraft is available, when appropriate, for transportation to and from Board and committee meetings and training seminars. Each of Messrs. Misheff and Smart had the use of an office and administrative support with respect to carrying out his duties as non-executive Chairman of the Board during his respective time serving in such role in 2018. We pay all fees associated with director and officer insurance and business travel insurance for our directors. In 2018, our directors were eligible to receive perquisites including limited personal use of the corporate aircraft, matching charitable contributions and gifts, the collective value of which was less than $10,000 for each director other than Mr. Smart. Directors are responsible for paying all taxes associated with perquisites and personal benefits.

It is critically important to us and our shareholders that we be able to attract and retain the most capable persons reasonably available to serve as our directors. As such, all directors have entered into written indemnification agreements, which are intended to secure the protection for our directors contemplated by our Amended Code of Regulations and Ohio law. Your Board adopted an updated form of director and officer indemnification agreement in May 2018, which replaced and superseded any prior indemnification agreement.

Each indemnification agreement provides, among other things, that we will, subject to the agreement terms, indemnify a director if by reason of their corporate status as a director, the person incurs losses, liabilities, judgments, fines, penalties, or amounts paid in settlement in connection with any threatened, pending, or completed proceeding, whether of a civil, criminal, administrative, or investigative nature. In addition, each indemnification agreement provides for the advancement of expenses incurred by a director, subject to certain exceptions, in connection with proceedings covered by the indemnification agreement. As a director and officer, the agreement for Mr. Jones addresses indemnity in both roles.

 

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Director Qualifications

 

 

The Corporate Governance, Sustainability and Corporate Responsibility Committee recommends Board candidates by identifying qualified individuals in a manner that is consistent with criteria approved by your Board. In consultation with the CEO, the Chairman of the Board and the full Board, the Corporate Governance, Sustainability and Corporate Responsibility Committee searches for, recruits, screens, interviews and recommends prospective directors to provide an appropriate balance of knowledge, experience, diversity attributes and capability on your Board. Suggestions for potential Board candidates come to the Corporate Governance, Sustainability and Corporate Responsibility Committee from a number of sources, including incumbent directors, officers and others. The Corporate Governance, Sustainability and Corporate Responsibility Committee has sole authority to retain and engage a third-party search firm to identify a candidate or candidates.

The Committee has actively engaged in director succession planning and regularly evaluates the addition of a director or directors with particular attributes with an appropriate mix of long-, medium-, and short-term tenured directors in its succession planning. Your Board has been able to attract high quality diverse candidates and did not use a third party to assist with the identification of potential nominees but would consider using a third party in the future, if needed or desired. The Corporate Governance, Sustainability and Corporate Responsibility Committee considers suggestions for candidates for membership on your Board, including candidates recommended by shareholders for your Board. Provided that shareholders suggesting director candidates have complied with the procedural requirements set forth in the Corporate Governance, Sustainability and Corporate Responsibility Committee Charter and Amended Code of Regulations, the Corporate Governance, Sustainability and Corporate Responsibility Committee applies the same criteria and employs substantially similar procedures for evaluating candidates suggested by shareholders for your Board as it would for evaluating any other Board candidate. The Corporate Governance, Sustainability and Corporate Responsibility Committee will give due consideration to all recommended candidates that are submitted in writing to the Corporate Governance, Sustainability and Corporate Responsibility Committee, in care of the Corporate Secretary, FirstEnergy Corp., 76 South Main Street, Akron, Ohio 44308-1890, received at least 120 days before the publication of your Company’s annual proxy statement from a shareholder or group of shareholders owning one half of one percent (0.5 percent) or more of your Company’s voting stock for at least one year, and accompanied by a description of the proposed nominee’s qualifications and other relevant biographical information, together with the written consent of the proposed nominee to be named in the proxy statement and to serve on your Board.

Attributes, Experience, Qualifications and Skills of your Board

In recruiting and selecting Board candidates, the Corporate Governance, Sustainability and Corporate Responsibility Committee takes into account the size of your Board and considers a “skills matrix” to determine whether those skills and/or other attributes qualify candidates for service on your Board. The attributes, experiences, qualifications and skills considered in accordance with Corporate Governance Policies and the Corporate Governance, Sustainability and Corporate Responsibility Committee charter for each director nominee led your Board to conclude that the nominee is qualified to serve on your Board.

 

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The high-level overview below depicts some of the attributes, experiences, qualifications and skills of our director nominees the committee takes into account. It is not intended to be an exhaustive list of each director nominee’s skills or contributions to your Board. Also, additional biographical information and qualifications for each nominee is provided in the “Biographical Information and Qualifications of Nominees for Election as Directors” section below and contains information regarding the person’s service as a director, principal occupation, business experience along with key attributes, experience and skills.

 

    Anderson   Demetriou   Johnson   Jones   Misheff   Mitchell   O’Neil   Pappas   Pianalto   Reyes   Turner

  CEO or senior leadership experience

  x   x   x   x   x   x   x   x   x   x   x

  Electric utility or nuclear power industry

      x   x     x   x       x  

  Regulatory environment familiarity

      x   x   x   x   x   x   x   x   x

  Engineering, innovation or technology

    x   x   x     x   x   x     x  

  Accounting or finance

  x   x     x   x   x   x   x   x     x

  Risk oversight or risk management

  x   x     x   x   x   x   x   x     x

  Environmental, Social, or Governance (ESG)

  x     x   x   x   x     x     x   x

  Other Public Company Directorship

  x   x   x     x     x   x   x    

  Independent

  x   x   x     x   x   x   x   x   x   x

  Diverse (Female)

      x             x     x

  Diverse (Race/Ethnicity)

      x               x   x

The Corporate Governance, Sustainability and Corporate Responsibility Committee regularly assesses the size and composition of your Board in light of the current operating requirements of your Company and the current needs of your Board. Each of the nominees brings a strong and unique background and skill set to your Board, giving your Board, as a whole, competence and experience in a wide variety of areas necessary to oversee the operations of your Company.

Your Company is committed to a policy of inclusiveness and believes that well assembled boards consist of a diverse group of individuals who possess a variety of complementary skills and experiences. Your Board and the Corporate Governance, Sustainability and Corporate Responsibility Committee is also committed to actively seeking out highly qualified women and minority candidates, as well as candidates with diverse backgrounds, skills and experience, to include in the pool from which Board nominees are chosen. Accordingly, your Board has set a goal that it will be composed of at least 30% diverse members (by race, ethnicity and gender combined) for the foreseeable future. The Corporate Governance, Sustainability and Corporate Responsibility Committee also considers differences in point of view, professional experience, education, and other individual skills, qualities, and attributes that contribute to the optimal functioning of your Board as a whole. Also, our Corporate Governance Policies provide that your Board will not nominate for election a non-employee director following his or her 72nd birthday.

Director Independence

Your Board annually reviews the independence of each of its members to make the affirmative determination of independence that is called for by our Corporate Governance Policies and required by the SEC and NYSE listing standards, including certain independence requirements of Board members serving on the Audit Committee, the Compensation Committee and the Corporate Governance, Sustainability and Corporate Responsibility Committee.

Your Board adheres to the definition of an “independent” director as established by the NYSE and the SEC. The definition used by your Board to determine independence is included in our Corporate Governance Policies and can be viewed by visiting our website at www.firstenergycorp.com/charters.

 

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Each year, our directors complete a questionnaire to assist your Board in assessing whether each director meets the NYSE’s independence standards and the related provisions in your Company’s Corporate Governance Policies. Your Company facilitates this review by examining its financial records to determine if amounts paid to or received from entities in which each non-employee director or immediate family member has a relationship based on responses to the questionnaires. Subject to the categorical standards approved by your Board and described below, a list of the entities and the amounts the Company paid to or received from those entities is provided to the Corporate Governance, Sustainability and Corporate Responsibility Committee. Utilizing this information, the Corporate Governance, Sustainability and Corporate Responsibility Committee presents to your Board (i) an evaluation, with regard to each director, whether the director has any material relationship with the Company or any of its subsidiaries; (ii) a recommendation of whether the amount of any payments between the Company and relevant entities could interfere with a director’s ability to exercise independent judgment; and (iii) a review of any other relevant facts and circumstances regarding the nature of these relationships, to determine whether other factors, regardless of the categorical standards your Board has adopted or under the NYSE’s independence standards, might impede a director’s independence. Based on a review of information concerning each of its non-employee directors and the recommendation of the Corporate Governance, Sustainability and Corporate Responsibility Committee, your Board will affirmatively determine whether a director may be considered “independent.”

Additionally, your Board recognizes that in the ordinary course of business, relationships and transactions may occur between your Company and its subsidiaries and entities with which some of our directors are or have been affiliated. Accordingly, our Corporate Governance Policies provide categorical standards to assist your Board in determining what does not constitute a material relationship for purposes of determining a director’s independence. The following commercial and charitable relationships will not be considered to be a material relationship that would impair a director’s independence: (i) if the director, an immediate family member or a person or organization with which the director has an affiliation purchases electricity or related products or services from the Company or its subsidiaries in the ordinary course of business and the rates or charges involved in the transaction are fixed in conformity with law or governmental authority or otherwise meet the requirements of Regulation S-K Item 404(a) Instruction 7, and (ii) the aggregate charitable contributions made by the Company to an organization with which a director, an immediate family member or a person or organization with which the director has an affiliation were less than $100,000 in each of the last three fiscal years. Notwithstanding the foregoing, your Board will not treat a director’s relationship with the Company as categorically immaterial if the relationship otherwise conflicts with the NYSE corporate governance listing standards or is required to be disclosed by the Company pursuant to Item 404 of Regulation S-K.

In making such determinations, your Board considered the fact that certain directors are executive officers of companies with which we conducted business. In addition, many of our directors are or were directors, trustees, or similar advisors of entities with which we conducted business or of non-profit organizations with which we conducted business and/or made contributions. Outside of their service as a Company director, none of your Company’s independent directors currently provide professional or other services to your Company, its affiliates or any officer of your Company and none of your Company’s directors are related to any executive officer of your Company.

Specifically, your Board considered the following relationships and transactions, which occurred in the ordinary course of business, between your Company and its subsidiaries and certain entities some of our directors have been affiliated with that existed or occurred during the preceding three years:

 

 

Regulated electric services and related products and services purchased from your Company (by a university where Ms. Pianalto serves as an executive in residence);

 

Non-regulated electric services and related non-electric products and services purchased from your Company (by companies where Ms. Pianalto and Messrs. Anderson and Pappas serve as directors, by a company where family members of Mr. Anderson are employed, by a university where Ms. Pianalto serves as an executive in residence, by a community college where Dr. Thornton is a president emeritus, and by a company where Mr. Reyes serves as a chairman of a nuclear safety review board);

 

Purchases by your Company of electric distribution and power generation related products and services (from companies where Dr. Thornton, Ms. Pianalto, and Messrs. Anderson, O’Neil and Pappas serve as directors, from a company where a family member of Mr. Anderson is employed and from a company where Mr. Reyes serves as a chairman of a nuclear safety review board);

 

Purchases by your Company of non-audit related services (from an accounting firm that is not our independent accountant where a family member of Mr. Misheff is employed);

 

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Purchases by your Company for information technology related services and office-related products and services (from a company where Ms. Pianalto serves as a director); and

 

Payments by your Company relating to charitable contributions and sponsorships, membership fees/dues, tuition for employee training and related expenses (to a university where Ms. Pianalto serves as an executive in residence, to an organization where Mr. Reyes serves as a training and accreditation board member and to a community college where Dr. Thornton is a president emeritus).

In all cases, your Board determined that the nature of the business conducted and any interest of the applicable director in that business were immaterial both to your Company and to the director. Pursuant to your Company’s Corporate Governance Policies, your Board also determined that the amounts paid to or received from the other entity affiliated with the applicable director in connection with the applicable transactions in each of the last three years did not exceed the greater of $1 million or two percent of the consolidated gross revenue of that entity, which is the threshold set forth in the NYSE listing standards and our Corporate Governance Policies. The Corporate Governance, Sustainability and Corporate Responsibility Committee determined that none of the relationships described above constituted a related person transaction requiring disclosure under the heading “Certain Relationships and Related Person Transactions” in this proxy statement. Also, in each case where the director is a current executive officer of another company, any transactions constituted less than one percent of your Company’s and the other company’s consolidated gross revenues in each of the last three completed fiscal years.

Based on the February 2019 independence review, your Board affirmatively determined that all non-employee director nominees – Michael J. Anderson, Steven J. Demetriou, Julia L. Johnson, Donald T. Misheff, Thomas N. Mitchell, James F. O’Neil III, Christopher D. Pappas, Sandra Pianalto, Luis A. Reyes and Leslie M. Turner – are independent pursuant to our Corporate Governance Polices, the rules and regulations of the SEC and the listing standards of the NYSE. Additionally, Mr. Paul T. Addison and Dr. Jerry Sue Thornton, who were not nominated for election to your Board at the Meeting pursuant to your Board’s mandatory retirement age policy, were considered independent directors. Mr. Jones is not considered an independent director because of his employment with your Company.

 

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Biographical Information and

Qualifications of Nominees for Election as Directors

 

 

The following provides information about each director nominee as of the date of this proxy statement. The information presented below includes each nominee’s specific experiences, qualifications, attributes, and skills that led the Corporate Governance, Sustainability and Corporate Responsibility Committee and your Board to the conclusion that he/she should serve as a director of your Company.

 

 

Michael J. Anderson

 

Position, Principal Occupation and Business Experience: Chairman of the board
of directors of The Andersons, Inc., a diversified public company with interests in the
grain, ethanol and plant nutrient sectors of U.S. agriculture, as well as in railcar
leasing and repair and turf products production, since 2016. He also served as CEO
and chairman of the board of directors from 2009 to 2015 and chief executive officer
from 1999 to 2015, of The Andersons, Inc. Director of your Company since 2007.

 

Key Attributes, Experience and Skills: Mr. Anderson received an M.B.A. in Finance
and Accounting from the Northwestern University Kellogg Graduate School of
Management and was a Certified Public Accountant. He participated in the Harvard
Advanced Management Program. Mr. Anderson was an auditor for Arthur Young &
Co. In 1996, he became president and chief operating officer of The Andersons, Inc.,
and he is currently that company’s chairman. Mr. Anderson’s experience in the
accounting and executive management areas are invaluable assets for your Board.

 

 

LOGO

 

Age 67

 

Committees:

Corporate

Governance,

Sustainability and
Corporate

Responsibility

(Chair); Finance

 

   

Steven J. Demetriou

 

Position, Principal Occupation and Business Experience: Chairman, chief
executive officer and director of Jacobs Engineering Group Inc., a provider of
technical professional and construction services, since August 2015. Chairman and
chief executive officer (from 2004 to 2015) of Aleris Corporation (“Aleris”), a
manufacturer of aluminum rolled products. Mr. Demetriou was chairman and chief
executive officer of Aleris when it filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code in 2009 and when it successfully emerged from those
proceedings in June 2010. He served as a director (from 2008 to 2014) and
non-executive chairman (from 2011 to 2014) of Foster-Wheeler AG; director of the
OM Group (from 2005 to 2015); and director of Kraton Corporation (from 2009 to
2017). Director of your Company since January 2017.

 

Key Attributes, Experience and Skills: Mr. Demetriou received his Bachelor of
Science degree in chemical engineering from Tufts University. His experience
extensive leadership and senior management roles, including the role of chief
executive officer. In addition, he brings experience in a variety of industries, including
engineering, construction and oil and gas. His extensive executive and board
experience has equipped him with leadership skills and the knowledge of board
processes and functions. This experience qualifies him to serve as a member of your
Board.

 

LOGO

 

Age 60

 

Committees:
Compensation;

Finance

 

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Julia L. Johnson

 

Position, Principal Occupation and Business Experience: President of
NetCommunications, LLC, a national regulatory and public affairs firm focusing
primarily on energy, telecommunications and broadcast regulation, since 2000. She
serves as a director of the following three other public companies: American Water
Works Company, Inc., MasTec, Inc., and NorthWestern Corporation. Director of your
Company since 2011.

 

Key Attributes, Experience and Skills: Ms. Johnson received her law degree from
the University of Florida College of Law after graduating from the University of Florida
with a Bachelor of Science in business administration. She is a former chairman and
commissioner of the Florida Public Service Commission, which provides her with
valuable insight into the electric utility industry. In her current position as president of
NetCommunications, LLC, she develops strategies for achieving objectives through
advocacy directed at critical decision makers. She previously served as senior vice
president of Communications and Marketing at Milcom Technologies and also has
additional public company board experience. Ms. Johnson’s extensive regulatory
background, legal experience and additional board experience qualify her to serve as
a member of your Board.

 

 

 

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Age 56

 

Committees:

Corporate

Governance,
Sustainability and
Corporate
Responsibility;

Nuclear

 

 

Charles E. Jones

 

Position, Principal Occupation and Business Experience: President, CEO and
director of your Company since January 1, 2015. He was Executive Vice President
and President, FirstEnergy Utilities throughout 2014, Senior Vice President and
President, FirstEnergy Utilities from 2010 to 2011, and also served as President of
your Company’s utility subsidiaries from 2010 through 2014. He also serves as a
director of many other subsidiaries of your Company, and served as a director and
executive officer of FirstEnergy Solutions Corp. (“FES”) and certain of its subsidiaries
from 2015 to 2016. From 2015 to 2017, Mr. Jones was chief executive officer of
FirstEnergy Nuclear Operating Company (“FENOC”). FES, its subsidiaries and
FENOC filed a voluntary petition under Chapter 11 of the United States Bankruptcy
Code in March 2018.

 

Key Attributes, Experience and Skills: Mr. Jones received an undergraduate
degree in electrical engineering from The University of Akron. He also attended the
United States Naval Academy and was a member of the Institute of Electrical and
Electronics Engineers. He completed the Reactor Technology Course for Utility
Executives at the Massachusetts Institute of Technology and the Public Utility
Executive Program at the University of Michigan. He has had an extensive career, at
Ohio Edison Company and later FirstEnergy Corp., and has held various executive
leadership positions, most recently Executive Vice President and President of
FirstEnergy Utilities, and currently President and CEO. With this vast experience,
Mr. Jones brings to your Board an extraordinary understanding of the inner workings
of the public utilities industry and FirstEnergy.

 

 

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Age 63

 

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Donald T. Misheff

 

Position, Principal Occupation and Business Experience: Non-executive
Chairman of the Board since May 2018. Retired in 2011 as managing partner
(position held since 2003) of the Northeast Ohio offices of Ernst & Young LLP, a
public accounting firm. He serves as a director of the following two other public
companies: TimkenSteel Corp. and Trinseo S.A. Director of your Company since
2012.

 

Key Attributes, Experience and Skills: Mr. Misheff graduated from The University of
Akron with a major in accounting and is a Certified Public Accountant. As the
managing partner of the Northeast Ohio offices of Ernst & Young LLP from 2003 until
his retirement in 2011, he advised many of the region’s largest companies on financial
and corporate governance issues. He began his career with Ernst & Young LLP in
1978 as part of the audit staff and later joined the tax practice, specializing in
accounting/financial reporting for income taxes, purchase accounting, and mergers
and acquisitions. He has extensive experience performing, reviewing, and overseeing
the audits of financial statements of a wide range of public companies. Mr. Misheff’s
vast financial and corporate governance experience, together with his extensive
experience with a wide range of public companies provides an excellent background
for his current position as our non-executive Chairman of the Board.

 

 

 

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Age 62

 

Committees:

Audit, Corporate

Governance;
Sustainability and
Corporate
Responsibility

 

 

Thomas N. Mitchell

 

Position, Principal Occupation and Business Experience: Chairman of the World
Association of Nuclear Operators since March 2019. Retired in 2015 as the president,
chief executive officer and director (positions held since 2009) of Ontario Power
Generation Inc. (“OPG”), an Ontario-based electricity generation company. He is also
a former director and member of the leadership and compensation committee of the
Electric Power Research Institute. Director of your Company since 2016.

 

Key Attributes, Experience and Skills: Mr. Mitchell received his undergraduate
degree in Engineering (Nuclear and Thermal Sciences) from Cornell University, his
Master of Science degree in Mechanical Engineering from George Washington
University and his LLD (Hon) from University of Ontario Institute of Technology, which
is an honorary degree. He has extensive experience in the nuclear industry and as a
senior executive. Prior to his most recent executive position at OPG, he held
progressively more responsible leadership roles before being named the site vice
president at the Peach Bottom Atomic Power Station, where he directed the
day-to-day operations of the station. He also served as a vice president for the
Institute of Nuclear Power Operations and as a Lieutenant (Naval Reactors) in the US
Navy. Mr. Mitchell’s industry experience, along with his broad leadership and business
skills, are essential to your Board.

 

 

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Age 63

 

Committee:

Nuclear (Chair),
Corporate

Governance;
Sustainability and
Corporate
Responsibility

 

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James F. O’Neil III

 

Position, Principal Occupation and Business Experience: Principal owner of
Forefront Solutions, LLC, which provides consulting services primarily to the energy
infrastructure industry, since October 2017. Former president, chief executive officer
and director of Quanta Services, Inc., a provider of specialty contracting services to
the electric power and oil and gas industries (from 2011 to 2016). He serves as a
director of the following three other public companies: Hennessey Capital Acquisition
Corp IV, NRC Group Holdings and Spark Power Group Inc. Director of your Company
since January 2017.

 

Key Attributes, Experience and Skills: Mr. O’Neil received his Bachelor of Science
degree in civil engineering from Tulane University. His has extensive leadership and
senior management experience, including the role of chief executive officer, chief
operating officer and senior vice president of operations integration and audit. His
extensive executive and board experience has equipped him with leadership skills
and the knowledge of board processes and functions. Additionally, Mr. O’Neil’s audit,
general corporate decision-making and engineering experience makes him a valuable
member to your Board.

 

 

 

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Age 60

 

Committees:

Audit (chair);
Nuclear

 

Christopher D. Pappas

 

Position, Principal Occupation and Business Experience: Retired in March 2019
as president and chief executive officer (positions held since 2010) of Trinseo S.A., a
producer of plastics, latex and rubber. Mr. Pappas transitioned to the role of special
adviser at Trinseo S.A., effective March 4, 2019. He also serves as a director of two
public companies: Trinseo S.A. and Univar Inc., a chemical distributor and provider.
Director of your Company since 2011. He was a director of Allegheny Energy from
2008 to 2011, and he became a director of your Company approximately seven
months after Allegheny Energy’s merger with your Company.

 

Key Attributes, Experience and Skills: Mr. Pappas received an M.B.A. from the
Wharton School, University of Pennsylvania and an undergraduate degree in Civil
Engineering from the Georgia Institute of Technology. He served in various
leadership capacities at NOVA Chemicals Corporation, Dow Chemical, and DuPont
Dow Elastomers. His extensive executive and board experience has equipped him
with leadership skills and the knowledge of board processes and functions.
Additionally, Mr. Pappas’ general corporate decision-making and senior executive
experience with a commodity-based business provides a useful background for
understanding the operations of your Company.

 

Other Information: Mr. Pappas serves as a special adviser at Trinseo S.A, as well
as a director of Univar Inc. and your Company. He manages the demands on his time
effectively in many ways: complementary committee memberships on Univar and
your Company have enhanced performance in serving these companies effectively;
Mr. Pappas is a seasoned director with almost 11 years’ service on your Company’s
and Allegheny Energy’s Board; he also has extensive executive experience, and his
specialized knowledge of the industry in which both Trinseo S.A. and Univar Inc.
operate creates efficiencies for Mr. Pappas in fulfilling his roles with those companies;
and differences in the number and duration of board meetings at the three companies
facilitates his attendance and performance as further discussed below.

 

Mr. Pappas is a highly engaged member of your Board that actively participates in
Board and committee matters. In 2018, he attended 100% of your Company’s Board
and committee meetings. He also has participated in engagement calls with certain
investors. Since becoming a director of your Company in 2011, Mr. Pappas has
attended approximately 98% of regularly scheduled Board and respective committee
meetings. Mr. Pappas is always well prepared for your Board and committee
meetings and is widely respected by fellow Board members for making informed and
meaningful contributions to the decision-making process at these meetings.

 

 

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Age 63

 

Committees:

Compensation

(Chair); Finance

 

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Sandra Pianalto

 

Position, Principal Occupation and Business Experience: Ms. Pianalto retired in
May 2014 as president and chief executive officer of the Federal Reserve Bank of
Cleveland, a position she held since 2003. Prior to retiring, Ms. Pianalto also chaired
the Federal Reserve’s Financial Services Policy Committee, which is a committee of
senior Federal Reserve Bank officials responsible for overall direction of financial
services and related support functions for the Federal Reserve Banks and for
leadership in the evolving U.S. payment system. Ms. Pianalto is an executive in
residence at the University of Akron. She also serves as a director of the following
three other public companies: Eaton Corporation plc, Prudential Financial, Inc. and
The J.M. Smucker Company. Director of your Company since February 2018.

 

Key Attributes, Experience and Skills: Ms. Pianalto received a master’s degree in
economics from The George Washington University and a bachelor’s degree in
economics from the University of Akron. She is also a graduate of the Advanced
Management Program at Duke University’s Fuqua School of Business. Ms. Pianalto
has extensive experience in monetary policy and financial services, and brings wide-
ranging leadership and operating skills through her former roles with the Federal
Reserve Bank of Cleveland and experience serving as a director of other public
companies. Ms. Pianalto joined the Federal Reserve Bank of Cleveland in 1983 as an
economist in the research department and held progressively more responsible
leadership roles before being named president and chief executive officer. As
president and chief executive officer of the Federal Reserve Bank of Cleveland, she
developed expertise in economic research, supervision of financial institutions, and
payment services to banks and the U.S. Treasury. In this role, Ms. Pianalto also
managed approximately 950 employees. Ms. Pianalto’s comprehensive experience
qualifies her to provide substantial guidance and oversight to your Board, particularly
in overseeing the Company’s finances.

 

 

 

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Age 64

 

Committees:

Compensation;

Finance

 

Luis A. Reyes

 

Position, Principal Occupation and Business Experience: Retired in 2011 as a
Regional Administrator (position held since 2008) of the U.S. Nuclear Regulatory
Commission (the “NRC”), a federal regulatory agency. Director of your Company
since 2013.

 

Key Attributes, Experience and Skills: Mr. Reyes received his undergraduate
degree in Electrical Engineering and his Master of Science degree in Nuclear
Engineering from the University of Puerto Rico. He has extensive experience in the
nuclear field and has held senior leadership positions with the NRC. He joined the
NRC in 1978 where he held progressively more responsible leadership roles before
being named executive director of operations in 2004, where he managed the
day-to-day operations of the agency. He also served as regional administrator for
NRC Region II, overseeing all new commercial nuclear power plant construction in
the country as well as operating plant inspections in the southeast United States.
Mr. Reyes retired from the NRC in 2011 with 33 years of service. Mr. Reyes’
engineering and industry experience is essential to your Board.

 

 

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Age 67

 

Committees:

Corporate

Governance,
Sustainability and
Corporate
Responsibility;

Nuclear

 

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Leslie M. Turner

 

Position, Principal Occupation and Business Experience: Retired in March 2018
as senior vice president, general counsel and corporate secretary (positions held
since 2012) of The Hershey Company, a global confectionery company. Director of
your Company since September 2018.

 

Key Attributes, Experience and Skills: Ms. Turner received her law degree from
the Georgetown University Law Center after graduating from the New York University
with a Bachelor of Science degree. She also received a Master of Laws in Law and
Government from the American University, Washington College of Law. Ms. Turner
has extensive and wide-ranging leadership, legal, governance and corporate strategy
skills through her former roles with The Hershey Company and The Coca-Cola
Company. Ms. Turner served as senior vice president, general counsel, and
corporate secretary of The Hershey Company from 2012 until her retirement in March
2018. In this role, Ms. Turner was the leader of Hershey’s legal, government
relations, corporate secretary, and corporate security functions. She also advised
Hershey on M&A opportunities and other stakeholder considerations facing publicly
traded companies. Prior to joining Hershey, Ms. Turner’s career included
progressively more responsible leadership roles at Coca-Cola North America, Akin
Gump Hauer & Feld, LLP and the senior executive service level of the federal
government. Ms. Turner’s legal experience and additional regulatory experience
qualify her to serve as a member of your Board.

 

 

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Age 61

 

Committees:

Audit;
Compensation

 

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Items to Be Voted On

 

 

 

Item  1

 

  

Election of Directors

 

Your Board recommends that you vote FOR All Nominees.

You are being asked to vote for the following 11 nominees to serve on your Board for a term expiring at the annual meeting of shareholders in 2019 and until their successors shall have been elected: Michael J. Anderson, Steven J. Demetriou, Julia L. Johnson, Charles E. Jones, Donald T. Misheff, Thomas N. Mitchell, James F. O’Neil III, Christopher D. Pappas, Sandra Pianalto, Luis A. Reyes and Leslie M. Turner. Ms. Turner was elected to your Board effective September 19, 2018 and is a nominee for election by shareholders at the Annual Meeting. Ms. Turner was recommended as a director by the members of our Corporate Governance, Sustainability and Corporate Responsibility Committee.

The “Biographical Information and Qualifications of Nominees for Election as Directors” section of this proxy statement provides information for all nominees for election at the Meeting. The “Director Qualifications” section of this proxy statement provides information relating to your Board’s and Corporate Governance, Sustainability and Corporate Responsibility Committee’s review of nominees. Your Board has no reason to believe that the persons nominated will not be available to serve after being elected. If any of these nominees would not be available to serve for any reason, shares represented by the appointed proxies will be voted either for a lesser number of directors or for another person selected by your Board. However, if the inability to serve is believed to be temporary in nature, the shares represented by the appointed proxies will be voted for that person who, if elected, will serve when able to do so.

Pursuant to your Company’s Amended Code of Regulations, at any election of directors, the persons receiving the greatest number of votes are elected to the vacancies to be filled; abstentions and broker non-votes will have no effect. However, our Corporate Governance Policies also provide that in an uncontested election of directors (i.e., an election where the only nominees are those recommended by your Board), any nominee for director who receives a greater number of votes “Withheld” from his or her election than votes “For” his or her election will promptly tender his or her resignation to the Corporate Governance, Sustainability and Corporate Responsibility Committee following certification of the shareholder vote. The Corporate Governance, Sustainability and Corporate Responsibility Committee will promptly consider the tendered resignation and will recommend to your Board whether to accept or reject the tendered resignation no later than 60 days following the date of the shareholders’ meeting at which the election occurred. In considering whether to recommend acceptance or rejection of the tendered resignation, the Corporate Governance, Sustainability and Corporate Responsibility Committee will consider factors deemed relevant by the committee members, including the director’s length of service, the director’s particular qualifications and contributions to your Company, the reasons underlying the majority withheld vote, if known, and whether these reasons can be cured, and compliance with stock exchange listing standards and the Corporate Governance Policies. In considering the Corporate Governance, Sustainability and Corporate Responsibility Committee’s recommendation, your Board will consider the factors considered by the Corporate Governance, Sustainability and Corporate Responsibility Committee and any such additional information and factors your Board believes to be relevant. Your Board will act on the Corporate Governance, Sustainability and Corporate Responsibility Committee’s recommendation no later than at its next regularly scheduled board meeting.

 

Your Board Recommends That You Vote “For” All Nominees in Item 1.

 

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Item  2

 

  

Ratification of the Appointment of the Independent Registered Public Accounting Firm For 2019

 

Your Board recommends that you vote FOR Item 2.

You are being asked to ratify the Audit Committee’s appointment of PricewaterhouseCoopers LLP as your Company’s independent registered public accounting firm to examine the books and accounts of your Company for the fiscal year ending December 31, 2019. While our Amended Code of Regulations does not require shareholders to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm, we are submitting the proposal for ratification as a matter of good corporate governance. However, if shareholders do not ratify the appointment, the Audit Committee will reconsider retaining PricewaterhouseCoopers LLP. Even if the appointment is ratified, the Audit Committee, at its discretion, may change the appointment at any time during the year if it determines that such a change would be in the best interests of your Company and its shareholders. A representative of PricewaterhouseCoopers LLP is expected to attend the Annual Meeting and will be available to respond to appropriate questions and have an opportunity to make a statement if he or she wishes to do so. We refer you to the “Matters Relating to the Independent Registered Public Accounting Firm” section of this proxy statement for information regarding services performed by, and fees paid to, PricewaterhouseCoopers LLP during the years 2017 and 2018. Item 2 requires the affirmative vote of a majority of the votes cast and abstentions will have no effect. There can be no broker non-votes on Item 2 as it is considered a “routine” matter under applicable NYSE rules.

 

Your Board Recommends That You Vote “For” Item 2.

 

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Item  3

 

  

Approve, on an Advisory Basis, Named Executive Officer Compensation

 

Your Board recommends that you vote FOR Item 3.

The following proposal provides shareholders the opportunity to cast an advisory, non-binding vote on compensation for the NEOs, (a “Say-on-Pay” vote) as further described in the CD&A and the related compensation tables and narrative disclosure. This resolution is required pursuant to Section 14A of the Securities Exchange Act of 1934. Currently, the advisory vote is held annually. The next advisory vote on NEO compensation is scheduled to occur at your Company’s 2020 Annual Meeting of Shareholders. Your Board strongly supports your Company’s executive pay practices and asks shareholders to support its executive compensation program by adopting the following resolution:

“RESOLVED, that the shareholders approve, on an advisory basis, the compensation of the FirstEnergy Corp. Named Executive Officers, as such compensation is disclosed pursuant to the compensation disclosure rules of the SEC, including the Compensation Discussion and Analysis, the compensation tables, and the other related narrative executive compensation disclosure contained in the proxy statement.”

The primary objectives of your Company’s executive compensation program are to attract, motivate, retain, and reward the talented executives, including the NEOs, who we believe can provide the performance and leadership to achieve success in the highly complex energy industry. Our executive compensation program is centered on a pay-for-performance philosophy. After robust benchmarking and shareholder outreach, the Compensation Committee and your Board approved a number of key changes effective in 2018 to better align executive pay with shareholder interests. Additionally, in 2017 and 2018, there were no increases in base salary and target opportunity levels as a percent of base salary, in the aggregate, for short-term and long-term incentive compensation for any Section 16 Insiders, including the NEOs (excluding promotions).

In deciding how to vote on this proposal, we encourage you to read the CD&A for a more detailed discussion of our executive compensation programs and practices, beginning on page 36.

Your Board strongly believes that our compensation philosophy, in conjunction with continued shareholder outreach, is in the best interests of shareholders. We will continue to annually review and evaluate all compensation plans and programs with the goal of aligning such plans and programs with market practice and the best interests of our shareholders. Item 3 is an advisory proposal that requires the affirmative vote of a majority of the votes cast; abstentions and broker non-votes will have no effect.

Although this advisory vote is non-binding, your Board and the Compensation Committee value the views of our shareholders and will consider the voting results when considering future executive compensation practices.

 

Your Board Recommends That You Vote “For” Item 3.

 

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Item  4

 

  

Approve a Management Proposal to Amend the Company’s Amended Articles of Incorporation and Amended Code of Regulations to Replace Existing Supermajority Voting Requirements with a Majority Voting Power Threshold as Permitted under Ohio Law

 

Your Board recommends that you vote FOR Item 4.

We are asking shareholders to consider amendments to your Company’s Amended Articles of Incorporation and Amended Code of Regulations to implement a majority voting power threshold for shareholder voting. If the proposal is approved, all shareholder voting requirements in the Company’s Amended Articles of Incorporation and Amended Code of Regulations that are described below would provide for a majority voting power threshold as permitted under Ohio law.

Background and Governance Considerations

This proposal is a result of an ongoing review of corporate governance matters by your Board and its Corporate Governance, Sustainability and Corporate Responsibility Committee and input from our shareholders. In connection with this review, your Company continued to conduct shareholder outreach discussions with shareholders owning a significant aggregate ownership interest in your Company to solicit input about possible amendments to its governing documents, including a majority voting power threshold for shareholder voting.

In 2013 and 2016, your Company presented a management proposal to adopt a majority voting power threshold under certain circumstances. In 2017 and 2018, your Company presented a substantially similar management proposal to adopt a majority voting power threshold. However, these proposals did not receive the requisite percentage of the voting power to amend your Company’s Amended Articles of Incorporation and Amended Code of Regulations. Consistent with its strong commitment to monitoring evolutions in governance practices and in light of the benefits of broad shareholder consensus and input from our shareholder engagement efforts, your Board has elected to again submit to a shareholder vote a proposal on this topic as described below. Your Board cannot unilaterally adopt the following proposed amendments because a shareholder vote is necessary under our governing documents.

Proposed Amendments

Your Board is proposing that voting requirements in your Company’s Amended Articles of Incorporation and Amended Code of Regulations that require a supermajority vote to take certain actions be changed to a majority of the voting power of the Company as permitted by Ohio law. Ohio law permits a corporation to elect to use a vote standard of greater or less than two-thirds, but not less than a majority of the voting power.

Ohio law establishes a default two-thirds voting power requirement for corporations relating to the following provisions: amending the articles of incorporation; reducing or eliminating stated capital; applying capital surplus to dividend payments; authorizing share repurchases; authorizing sales of all or substantially all the Company’s assets; adopting a merger agreement or other merger-related actions; authorizing a combination or majority share acquisition; dissolving the Company; releasing pre-emptive rights; or authorizing a dividend to be paid in shares of another class. Ohio law also permits corporations to elect to be subject to not less than a majority voting power requirement with respect to such provisions. Article IX of the Amended Articles of Incorporation currently authorizes your Board to reduce this voting requirement to a majority of the voting power of the Company in its discretion. Your Board proposes to amend Article IX of the Amended Articles of Incorporation to provide for a majority of the voting power of the Company on these matters.

Article X of the Amended Articles of Incorporation establishes an 80 percent supermajority voting requirement to amend or repeal the following provisions of the Amended Articles of Incorporation: Article V — the fixing or changing of the terms of unissued or treasury shares; Article VI — the absence of cumulative voting rights in the election of directors; Article VII — the absence of preemptive rights to acquire unissued shares; Article VIII — the ability of the company to repurchase its shares and Article X — the supermajority voting requirement. Given the proposed change to Article IX, which already governs amending the Amended Articles of Incorporation, Article X would be eliminated.

 

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Similarly, Regulation 36 of the Amended Code of Regulations establishes an 80 percent supermajority voting requirement to amend or repeal certain regulations: Regulation 1 — the time and place of shareholder meetings; Regulation 3(a) — the calling of special shareholder meetings; Regulation 9 — the order of business at shareholder meetings; Regulation 11 — the number, election and term of directors; Regulation 12 — the manner of filling vacancies on the board of directors; Regulation 13 — the removal of directors; Regulation 14 — the nomination of directors and elections; Regulation 31 — the indemnification of directors and officers; and Regulation 36 — amendments to the Code of Regulations. Regulation 36 would be amended to lower the vote requirement to a majority of the voting power of the Company.

In addition, your Board proposes to change the 80 percent supermajority voting requirement in Regulations 11 and 13 of the Amended Code of Regulations. Currently, Regulation 11 of the Amended Code of Regulations enables a change in the number of directors of the Company, and Regulation 13 provides that any director or the entire Board of Directors may be removed, in each case only by the affirmative vote of the holders of at least 80 percent of the voting power of the Company, voting together as a single class. Your Board proposes to reduce this 80 percent supermajority voting requirement in both cases to a majority of the voting power.

The proposed amendments to the Amended Articles of Incorporation and Amended Code of Regulations are set forth in Appendix A, with deletions indicated by strike-throughs and additions indicated by underlining. The summary above is qualified in its entirety by reference to the full text of the proposed amendments in Appendix A.

Effectiveness and Vote Required

Your Board has adopted resolutions approving and recommending that shareholders approve the amendments to the Amended Articles of Incorporation and Amended Code of Regulations reflected in Appendix A, which are subject to the approval of the amendments by shareholders at the Annual Meeting, and authorizing the preparation and filing of any document necessary or advisable to implement such amendments. The amendments, if approved, would be expected to become effective prior to the next annual shareholder meeting. Approval of this proposal requires the affirmative vote of at least 80 percent of the voting power of the Company. Abstentions and broker non-votes will be counted and have the same effect as a vote “against” this item.

 

Your Board Recommends That You Vote “For” Item 4.

 

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Item  5

 

  

Approve a Management Proposal to Amend the Company’s Amended Articles of Incorporation and Amended Code of Regulations to Implement a Majority Voting Standard for Uncontested Director Elections

 

Your Board recommends that you vote FOR Item 5.

We are asking shareholders to consider amendments to your Company’s Amended Articles of Incorporation and Amended Code of Regulations to implement a majority voting standard in uncontested director elections. Our Amended Code of Regulations currently provides for the election of directors by a plurality of votes cast, and our Corporate Governance Policies include a director resignation policy. The plurality voting standard is also the default voting standard for the election of directors under Ohio law.

Background and Governance Considerations

This proposal is a result of ongoing review of corporate governance matters by your Board and its Corporate Governance, Sustainability and Corporate Responsibility Committee and input from our shareholders. Your Board and its Corporate Governance, Sustainability and Corporate Responsibility Committee has concluded that the adoption of the proposed majority voting standard in uncontested elections will give shareholders a greater voice in determining the composition of your Board by requiring support of a majority of shareholder votes cast for a candidate to obtain or retain a seat on our Board, and by giving greater effect to shareholder votes “against” a director candidate. Your Board is proposing these amendments in response to shareholder preferences and to reinforce our commitment to accountability and strong corporate governance practices.

In 2017 and 2018, your Company presented a substantially similar management proposal; however, the proposal did not receive the requisite percentage of the voting power to amend your Company’s Amended Articles of Incorporation and Amended Code of Regulations. Consistent with its strong commitment to monitoring evolutions in governance practices and in light of the benefits of broad shareholder consensus and input from our shareholder engagement efforts, your Board has elected to again submit to a shareholder vote a proposal on this topic as described below. Your Board cannot unilaterally adopt the following proposed amendments because a shareholder vote is necessary under our governing documents.

Proposed Amendments

Your Board is proposing to change director election voting requirements in your Company’s Amended Code of Regulations, which currently provide for a plurality voting standard, to provide for a majority voting standard for uncontested director elections and a plurality voting standard in contested elections and to provide for such change in your Company’s Amended Articles of Incorporation.

Under the proposed majority voting standard, for a candidate to be elected to your Board in an uncontested election, the number of votes cast “for” the candidate’s election must exceed the number of votes cast “against” his or her election and abstentions and broker non-votes would not be considered votes “for” or “against” a candidate. An “uncontested election” means an election in which the number of Director candidates does not exceed the number of Directors to be elected. In all other director elections, which we refer to as “contested elections,” a plurality voting standard would apply. If adopted by shareholders at this Annual Meeting of Shareholders, the majority voting standard would apply to all future uncontested director elections.

Your Board believes that a plurality voting standard should still apply in contested director elections. If the plurality voting standard did not apply in contested elections, it is possible that more candidates could be elected than the number of director seats up for election because the proposed majority voting standard simply compares the number of “for” votes with the number of “against” votes for each director candidate without regard to voting for other candidates. Accordingly, the proposed majority voting standard retains plurality voting in contested director elections to avoid such results.

Under Ohio law and your Company’s Amended Code of Regulations, an incumbent director who is not re-elected remains in office until his or her successor is elected, continuing as a “holdover” director. If this

 

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proposal is approved, we will make conforming revisions to the existing director resignation policy (discussed on page 25) in your Company’s Corporate Governance Policies to reflect that an incumbent director who does not receive more votes “for” than “against” his or her election in an uncontested election will promptly submit a written offer of resignation to the Corporate Governance, Sustainability and Corporate Responsibility Committee, which will make a recommendation to your Board within 60 days following the date of the election as to whether or not it should be accepted. Your Board will consider the recommendation and decide whether to accept the resignation, as described in more detail in our Corporate Governance Policies. Furthermore, if one or more directors standing for election does not receive a majority of the votes cast and his or her resignation is accepted by your Board, your Board may fill the vacancy without any further shareholder vote.

Your Company’s Amended Code of Regulations provides for a plurality voting standard in the election of directors. To implement a majority voting standard, Ohio law requires the Amended Articles of Incorporation to be amended. Additionally, your Company’s Amended Code of Regulations requires a conforming amendment. The actual text of the proposed amendment to your Company’s Amended Articles of Incorporation, including a new Article XII, and amendment to Regulation 11 of your Company’s Amended Code of Regulations, marked with underlining to indicate additions and strike-throughs to indicate deletions, are attached to this Proxy Statement as Appendix B. The amendment to the Amended Articles of Incorporation will become effective upon filing the Amendment to the Amended Articles of Incorporation with the Secretary of State of Ohio.

The above disclosure is qualified in its entirety by reference to the full text of the proposed amendments in Appendix B.

Effectiveness and Vote Required

Your Board has adopted resolutions approving and recommending that shareholders approve the amendments to the Amended Articles of Incorporation and Amended Code of Regulations reflected in Appendix B, which are subject to the approval of the amendments by shareholders at the Annual Meeting, and authorizing the preparation and filing of any document necessary or advisable to implement such amendments. The amendments, if approved, would be expected to become effective prior to the next annual shareholder meeting. Approval of this proposal requires the affirmative vote of at least 80 percent of the voting power of the Company. Abstentions and broker non-votes will be counted and have the same effect as a vote “against” this item.

 

Your Board Recommends That You Vote “For” Item 5.

 

 

 

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Item  6

 

  

Approve a Management Proposal to Amend the Company’s Amended Code of Regulations to Implement Proxy Access

 

Your Board recommends that you vote FOR Item 6.

We are asking shareholders to consider an amendment to your Company’s Amended Code of Regulations to implement “proxy access.” Proxy access, as further described below, allows eligible shareholders to include their own nominee or nominees for election to your Board in our proxy materials, along with your Board-nominated candidates.

Background and Governance Considerations

This proposal is a result of an ongoing review of corporate governance matters by your Board and its Corporate Governance, Sustainability and Corporate Responsibility Committee and input from our shareholders. Your Board and the Corporate Governance, Sustainability and Corporate Responsibility Committee have considered the advantages and disadvantages of providing proxy access rights to shareholders, including the view expressed by a number of our shareholders during our outreach that proxy access rights would increase the accountability of directors to shareholders and would allow shareholders to express preferences in director nominations more easily. This proxy access proposal addresses our outreach findings and is in line with market practices.

In 2016, 2017 and 2018, your Company presented substantially similar management proposals; however, these proposals did not receive the requisite percentage of the voting power to amend the Amended Code of Regulations. Consistent with its strong commitment to monitoring evolutions in governance practices and in light of the benefits of broad shareholder consensus and input from our shareholder engagement efforts, your Board has elected again to submit to a shareholder vote a proposal on this topic as described below. Your Board cannot unilaterally adopt the following proposed amendment because a shareholder vote is necessary under our governing documents.

Proposed Amendment

Your Board is proposing an amendment to your Company’s Amended Code of Regulations that permit certain shareholders to include a specified number of director nominees in our proxy materials for our annual meeting of shareholders.

The proposed amendment would permit a single shareholder, or group of up to 20 shareholders, holding full voting and investment rights and the full economic interest, that has maintained continuous ownership of at least three percent of the Company’s outstanding common stock for at least the previous three years to include a specified number of director nominees, as described below, for election to your Board in the proxy statement for the Company’s annual meeting of shareholders.

Number of Shareholder-Nominated Candidates

The maximum number of shareholder-nominated candidates would be equal to 20 percent of the directors in office as of the last day a shareholder nomination may be delivered or received or, if the 20 percent calculation does not result in a whole number, the closest whole number below 20 percent and in any event, not less than two shareholder nominated candidates. If your Board decides to reduce the size of your Board after the nomination deadline due to director retirement, resignation or otherwise, the 20 percent calculation will be applied to the reduced size of your Board, with the potential result that a shareholder-nominated candidate may be disqualified. Shareholder-nominated candidates that your Board determines to include in the proxy materials as Board-nominated candidates will be counted against the maximum.

Procedure for Selecting Candidates in the Event the Number of Nominees Exceeds the Maximum

Nominating shareholders are required to provide a list of their proposed nominees in rank order. If the number of shareholder-nominated candidates exceeds the maximum number of permitted shareholder candidates, the highest ranked nominee from the nominating shareholder or group of nominating shareholders, as the case may be, with the largest qualifying ownership will be selected for inclusion in the

 

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proxy materials first followed by the highest ranked nominee from the nominating shareholder or group of shareholders, as the case may be, with the next largest qualifying ownership, and continuing on in that manner, until the maximum number of nominees is reached.

Nominating Procedure

Requests to include shareholder-nominated candidates in your Company’s proxy materials must be received, under most circumstances, no earlier than 150 days and no later than 120 days before the anniversary of the date that your Company issued its proxy statement for the previous year’s annual meeting of shareholders. Each shareholder or shareholder group seeking to include a shareholder nominee in your Company’s proxy materials is required to provide certain information, including, but not limited to, the verification of share ownership, biographical information about the nominee and certain representations, as set forth in the proposed amendment attached hereto as Appendix C.

Independence and Other Qualifications of Shareholder Nominees

A shareholder nominee would not be eligible for inclusion if your Board determines that he or she is not independent under the listing standards of the principal U.S. exchange upon which the common stock of your Company is listed (which is the NYSE), any applicable rules of the SEC, or any publicly disclosed standards used by your Board in determining and disclosing the independence of your Company’s directors.

Furthermore, a shareholder nominee would not be qualified to be a director of your Company if, among other things: (i) his or her election would cause your Company to be in violation of its governing documents, the listing standards of the principal U.S. exchange upon which the common stock of your Company is listed, any applicable federal law, rule or regulation or your Company’s publicly disclosed policies and procedures; (ii) he or she has been an officer or director of a competitor, as defined in Section 8 of the Clayton Antitrust Act of 1914, within the past three years; (iii) he or she is a named subject of a pending criminal proceeding or has been convicted in a criminal proceeding within the past 10 years (excluding traffic violations and other minor offenses); (iv) he or she is subject to certain enforcement orders related to the regulation of securities; or (v) he or she has provided, or his or her nominating shareholder or group of nominating shareholders has provided, information to us that is not accurate, truthful and complete in all material respects, or that otherwise contravenes certain specified agreements, representations or undertakings.

The proposed amendment to the Amended Code of Regulations is set forth in Appendix C, with deletions indicated by strike-throughs and additions indicated by underlining.

The above disclosure is qualified in its entirety by reference to the full text of the proposed amendment in Appendix C.

Effectiveness and Vote Required

Your Board has adopted a resolution approving and recommending that shareholders approve the amendment to the Amended Code of Regulations reflected in Appendix C, which are subject to the approval of the amendment by shareholders at the Annual Meeting, and authorizing the preparation and filing of any documents necessary or advisable to implement such amendment. The amendment, if approved, would be expected to become effective prior to the next annual shareholder meeting. Approval of this proposal requires the affirmative vote of at least 80 percent of the voting power of the Company. Abstentions and broker non-votes will be counted and have the same effect as a vote “against” this item.

 

Your Board Recommends That You Vote “For” Item 6.

 

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Shareholder Proposal

One shareholder proposal has been submitted for consideration and action by shareholders.

The shareholder resolution and proposal, for which your Company and your Board disclaim responsibility, are set forth below and are reproduced verbatim in accordance with the applicable rules and regulations. The shareholder resolution and proposal may contain assertions that we believe are factually incorrect. We have not attempted to refute all of the inaccuracies. After careful consideration, your Board recommends that you vote “AGAINST” the shareholder proposal in Item 7 for the reasons noted in your Company’s response following the shareholder proposal.

 

Item  7

 

  

Shareholder Proposal

 

X Your Board recommends that you vote AGAINST Item 7.

John Chevedden, 2215 Nelson Avenue, No. 205, Redondo Beach, California 90278, plans to introduce the following resolution at the Annual Meeting. We have been notified that Mr. Chevedden is the beneficial owner of no less than 90 shares of your Company’s common stock.

Proposal 7 – Simple Majority Vote

RESOLVED, Shareholders request that our board take each step necessary so that each voting requirement in our charter and bylaws (that is explicit or implicit due to default to state law) that calls for a greater than simple majority vote be eliminated, and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws. If necessary this means the closest standard to a majority of the votes cast for and against such proposals consistent with applicable laws.

The Board of Directors, with a fiduciary duty to shareholders, may find it necessary to adjourn the annual meeting to solicit the votes necessary for approval if the votes for approval are lacking during the annual meeting as they have been for a seemingly countless number of years on this same proposal topic at FirstEnergy. To facilitate this - adjourn appears 10-times in the FirstEnergy governing documents.

Shareholders are willing to pay a premium for shares of companies that have excellent corporate governance. Supermajority voting requirements have been found to be one of 6 entrenching mechanisms that are negatively related to company performance according to “What Matters in Corporate Governance” by Lucien Bebchuk, Alma Cohen and Allen Ferrell of the Harvard Law School. Supermajority requirements are used to block initiatives supported by most shareowners but opposed by a status quo management.

This proposal topic won from 74% to 88% support at Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy, McGraw-Hill and Macy’s. The proponents of these proposals included Ray T. Chevedden and William Steiner. The votes would have been higher than 74% to 88% if all shareholders had equal access to independent proxy voting advice.

Currently a 1%-minority can frustrate the will of our 79% shareholder majority in an election in which 80% of shares cast ballots. In other words a 1%-minority have the power to prevent 79% of shareholders from taking important action such as eliminating 80%-voting thresholds in our governing documents.

Please vote yes:

Simple Majority Vote-Proposal 7

 

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Your Company’s Response — Item 7 — Shareholder Proposal Requesting Steps to Implement Simple Majority Voting

This non-binding shareholder proposal requests that your Board take the steps necessary so that each shareholder voting requirement in your Company’s Amended Articles of Incorporation and Amended Code of Regulations that “calls for a greater than simple majority vote be eliminated, and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws.”

We encourage you to refer to your Company’s proposal (Item 4 above), which is a binding proposal that would implement a majority voting power threshold for shareholder voting. As described in Item 4 above, Ohio law provides that certain voting requirements can be changed to a majority of the voting power of your Company, not a majority of votes cast as stated in the shareholder proposal.

Because the Company’s proposal (Item 4 above) is binding, if approved by shareholders, the proposal would be implemented. However, if this non-binding shareholder proposal is approved by shareholders, there is no obligation for the Company to implement it and the approval of both proposals could lead to confusing results. In sum, your Board believes the proposal put forth by your Company in Item 4 above more appropriately and effectively implement the policy at issue and serves the best interests of our shareholders.

 

Your Board recommends that you

vote “AGAINST” this shareholder proposal (Item 7).

   X

 

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Executive Compensation

 

 

Compensation Committee Report

 

 

The Compensation Committee reviewed and discussed the CD&A with management and, based on such review and discussions, the Compensation Committee recommended to your Board that the CD&A be included (or incorporated by reference, as applicable) in your Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and 2019 Proxy Statement.

Compensation Committee: Christopher D. Pappas (Chair), Steven J. Demetriou, Sandra Pianalto, Dr. Jerry Sue Thornton, and Leslie M. Turner.

Compensation Discussion and Analysis

 

 

Introduction

This CD&A provides an overview of your Company’s strategy and performance, shareholder engagement process, and 2018 executive compensation programs and decisions, and plans for the 2019 compensation programs. This CD&A focuses on the compensation of our NEOs for fiscal year 2018 who were as follows:

 

   
  Named Executive  Officer    Title

  Charles E. Jones

   President and CEO

  Steven E. Strah

   Senior Vice President and Chief Financial Officer (“CFO”)

  James F. Pearson

   Executive Vice President, Finance (former CFO)

  Leila L. Vespoli

   Executive Vice President, Corporate Strategy, Regulatory Affairs and Chief Legal Officer

  Samuel L. Belcher

   Senior Vice President and President, FirstEnergy Utilities

  Bennett L. Gaines

   Senior Vice President, Corporate Services and Chief Information Officer

  Donald R. Schneider

   President, FirstEnergy Solutions Corp. (“FES”) (1)

 

(1)

Effective March 2, 2019, Mr. Schneider stepped down as President of FES and remains the executive chairman of the board of directors of FES. He will retire as an officer effective May 1, 2019 as discussed further in this CD&A.

During 2018, Mr. Pearson, formerly Executive Vice President and Chief Financial Officer, became the Executive Vice President, Finance, Mr. Strah became Senior Vice President and CFO, and Mr. Belcher became Senior Vice President and President, FirstEnergy Utilities and was appointed as an executive officer of your Company. As a former employee and President and Chief Nuclear Officer (“CNO”) of FirstEnergy Nuclear Operating Co (“FENOC”) and due to the strategic review to exit competitive generation, Mr. Belcher did not participate in all of the same compensation programs as the other NEOs. We have outlined where there are differences to the compensation programs for Mr. Belcher in this proxy statement. Unless otherwise noted, however, all information contained in the CD&A applies to Mr. Belcher.

Beginning in February 2018, Mr. Schneider was no longer designated an executive officer of your Company due to his role at FES; however, he continued to meet disclosure requirements as a NEO. As an employee of FES, and due to the strategic review to exit competitive generation, Mr. Schneider did not participate in all of the same compensation programs as the other NEOs. The compensation programs for FES participants that applied to Mr. Schneider are described separately in this proxy statement. Unless otherwise noted, all information contained in the CD&A applies to Mr. Schneider.

 

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CD&A Quick Reference Guide

 

 

Key Sections

 

 

 

Core Topics

 

  

 

    Page    

 

     
Executive Summary  

•  Our Fully Regulated Business Strategy

 

•  Strategic Initiatives

 

•  Shareholder Engagement and Say-on-Pay Results

 

•  Our Responses in 2018 to Shareholder Feedback

 

  

38

     
Governance of Our Compensation Programs  

•  Compensation Philosophy

 

•  What We Do and Don’t Do

 

•  Role of our Compensation Committee, Management and Compensation Consultant

 

•  Benchmarking

 

  

42

     
Components of Total Direct Compensation Programs  

•  Key Elements of 2018 Executive Compensation

 

•  Compensation Mix

 

•  Determination of Compensation

 

-  2018 Target Compensation (Base Salary + Incentive Compensation)

 

-  2018 FE Short-term Incentive Program (“FE STIP”)

 

-  Long-term Incentive Program (“FE LTIP”) awards (for NEOs other than Mr. Schneider)

 

-  2018 Performance-Adjusted Restricted Stock Units (“Transition Award”) for Mr. Belcher

 

-  Key Employee Retention Plan (“KERP”) for Mr. Belcher

 

-  2018 Annual Incentive Program (“AIP”) for Mr. Schneider

 

•  Incentive Compensation Payouts for 2018

 

•  Outstanding Award Cycles (2017-2019 and 2018-2020)

 

•  Potential Negative Discretion for the 2016-2018 and 2017-2019 FE LTIP Cycles

 

•  Realized Compensation

 

•  2019 Incentive Plan Design and NEO Compensation

 

  

47

     
Other Compensation Policies and Practices  

•  Retirement, Other Benefits and Perquisites

 

•  Severance and Change in Control (“CIC”) Policies

 

•  Share Ownership Guidelines and Prohibitions on Hedging and Pledging Shares

 

•  Clawback Provisions Policy

 

•  Risk Assessment of Compensation Programs

 

•  Impact of Tax Requirements on Compensation

 

  

59

     

 

Key Performance Indicator (“KPI”) Results and RSU Index Scores

 

•  2016-2018 Cycle FE LTIP Details

 

  

65

     

 

CD&A Glossary of Terms

 

•  Key Terms and Definitions

 

  

67

 

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Executive Summary

 

 

Our Fully Regulated Business Strategy

FirstEnergy is a forward-thinking electric utility powered by a diverse team of employees committed to making customers’ lives brighter, the environment better and our communities stronger. In 2018, we made significant progress with our strategy to become a fully regulated utility company, focusing on stable and predictable earnings and cash flow from our regulated business units. The Company has made significant strides to grow regulated earnings and improve financial strength in many areas as we successfully position as a fully regulated business:

 

   

Significant investment in Energizing the Future transmission program

 

   

Strengthened balance sheet and restructured organization and costs to increase financial flexibility in the regulated businesses

 

   

Implemented D&I initiatives to help drive financial performance

In 2018, FirstEnergy continued to successfully address these initiatives aggressively, which led the way to several major announcements. Following a $2.5 billion equity investment in your Company from several prominent investors in January, in February we announced an over $11 billion capital plan to be invested in our regulated businesses over the next several years.

Through FirstEnergy’s “FE Tomorrow” initiative, your Company implemented a cost cutting initiative to define the corporate services FirstEnergy would need to support its regulated business once the company exited competitive generation. Through the initiative, FirstEnergy sought to ensure the company has the right talent, organizational and cost structure to efficiently service customers and achieve its earnings growth targets. In support of the FE Tomorrow initiative, more than 80% of eligible employees, totaling nearly 500 people in the shared services, utility services and sustainability organizations accepted a Voluntary Enhanced Retirement Package (“VERP”) that included severance compensation and a temporary pension enhancement, with most employees having already retired. Those that accepted the VERP also included Ms. Vespoli and Mr. Pearson, pursuant to an Executive VERP (“E-VERP”), and Mr. Schneider, pursuant to a Voluntary Early Retirement Option (“FES VERO”), which both contained substantially the same terms as the VERP, and is discussed further in the CD&A. Management expects the cost savings resulting from the FE Tomorrow initiative to support the company’s growth targets.

With respect to the voluntary petitions for relief filed under Chapter 11 of the United States Bankruptcy Code by our competitive subsidiary FES and all of its subsidiaries, as well as FENOC in March 2018 (the “FES Bankruptcy”), the U. S. Bankruptcy Court for the Northern District of Ohio (“Bankruptcy Court”), on September 26, 2018, approved the Company’s definitive settlement with the FES debtor parties. Among other terms, the settlement agreement granted a full release of all claims against FirstEnergy by the FES debtors and their creditors. However, the FES Bankruptcy settlement agreement and the releases granted therein are subject to material conditions, which primarily consist of the issuance of a final order by the Bankruptcy Court approving the plan or plans of reorganization for the FES debtor parties which are acceptable to the Company.

These developments serve as significant milestones in our transition to becoming a high-performing, fully regulated utility company as well as better position us to deliver stable, long-term value for our shareholders and customers. Your Board is pleased with the progress that has been made and management’s execution during this pivotal company transition.

Strategic Initiatives

Achievement of our strategic initiatives has strengthened our balance sheet and provided the financial flexibility necessary to transition to a high-performing fully regulated Company. Your Company has transformed into an organization focused on more stable and predictable earnings and cash flow from its fully regulated business units. These units are Regulated Distribution and Regulated Transmission - which focus on delivering enhanced customer service and reliability. Together, the Regulated Distribution/Regulated Transmission businesses are expected to provide stable, predictable earnings and cash flows that support FE’s dividend. To further reflect on the Company’s confidence in its long-term, sustainable growth plan, in November 2018, the Board approved a new dividend policy targeting a payout ratio of 55% to 65% of the Company’s non-GAAP earnings. As a result, your Company announced a dividend payable

 

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on March 1, 2019 of $0.38 per share, representing an increase of $0.02 per share. The growth in dividend rate will enable enhanced shareholder returns while continuing with substantial regulated investments.

The scale and diversity of our ten utility operating companies that comprise the Regulated Distribution business uniquely position this business for growth through opportunities for additional investment. Since 2015, Regulated Distribution has experienced significant growth through investments that have improved reliability and added operating flexibility to the distribution infrastructure, which provide benefits to the customers and communities those Utilities serve. The Regulated Distribution business has $6.2 - $6.7 billion in planned capital investment from 2018 through 2021.

With approximately 24,500 miles in operations, the Regulated Transmission business is the centerpiece of FirstEnergy’s regulated investment strategy with approximately 80% of its capital investments recovered under forward-looking formula rates. Regulated Transmission has also experienced significant growth as part of its Energizing the Future transmission plan with plans to invest up to $4.8 billion from 2018 through 2021. These investments are expected to strengthen grid and cyber-security and make the transmission system more reliable, with improved operational flexibility.

 

   

A critical component of your Company’s success centers on delivering on our roadmap to move the D&I culture forward. Companies that are more diverse are better able to attract top talent as well as improve decision making, innovation, employee engagement and their understanding of customer needs. There is a consistent correlation between diversity and financial performance. Over the last three years, we have laid the foundation for our D&I initiatives by addressing the drivers of employee engagement and branding:

 

   

Established executive leadership D&I council with full time D&I resources;

 

   

Benchmarked leading utility and industry D&I programs;

 

   

Companywide training for D&I imperative and unconscious bias; and

 

   

Established Employee Business Resource Groups.

 

   

FirstEnergy has developed an ESG/Sustainability strategy that provides opportunities to increase the diversity of our employees, make customer lives brighter, our environment better, and our communities stronger. D&I has become one of our advancing core values and is woven into the fabric of our operation and practices. Our focus now is to build and sustain a high-performing, innovative and diverse team culture through:

 

   

Launching the D&I Employee Survey seeking critical feedback from employees;

 

   

Process enhancements to improve our recruiting and promotion outcomes (diverse slates, diverse interviewing teams, and interview team selection discussions);

 

   

Embedded accountability for D&I as a priority for managers and above; and

 

   

Implemented metrics and a compensable D&I KPI for leaders to measure progress and drive improvement in the diversity of our leadership pipeline, workforce representation and overall employee inclusion.

While we are proud of our strategic and operational results, we are also encouraged by the gains in our stock price over the past year following the uncertainty associated with transitioning away from commodity exposed generation. Based on publicly available guidelines on Institutional Shareholder Services methodology, FirstEnergy generated a Total Shareholder Return (“TSR”), or stock price change plus the value of reinvested dividends, over the last three years of 10.8% and over the last year of 25.2%. Given that our executives met rigorous financial and operational goals, the compensation programs ending in 2018 resulted in above-target payouts to NEOs. The Compensation Committee determined that it would be in the best interests of the Company to pay out the incentive plans in 2018 as designed. The Board further determined that this decision was important to demonstrate its strong confidence in the executive team, while serving as a retention mechanism for our very capable executives during a critical period in your Company’s evolution.

 

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Shareholder Engagement and Say-on-Pay Results

Based in part on shareholder engagement, we made substantial changes to our compensation plans and programs for 2018 which are described in the proxy statement. As we prepared for 2018, the Committee and management recognized pay and performance alignment concerns with our incentive programs. In 2017, the CEO voluntarily reduced his incentive compensation opportunities to levels consistent with 2015 and the Board approved an increase in his share ownership guidelines. The CEO compensation and share ownership levels were maintained for 2017, 2018 and 2019. For the second consecutive year (e.g., 2017 and 2018), there were no base salary increases and no increase in target opportunity levels as a percent of base salary, in the aggregate, for short-term and long-term incentive compensation, for the Section 16 Insiders (excluding promotions).

Our Board and management are committed to engaging our shareholders and soliciting their perspectives on key performance, compensation and governance issues. Select board members and management representatives conducted extensive outreach during 2018, focused on the top 100 shareholders, who accounted for nearly 68% of the outstanding shares at that time. Our 2018 Say-On-Pay vote successfully passed with over 95% support, which we believe was an early vote of confidence and a direct result of the substantial changes that we made to our compensation plans and programs for 2018.

We continue to engage with shareholders and gather feedback on our compensation programs to use in our annual review of our incentive programs. Our outreach efforts include in-person discussions and phone calls with many of our top 20 shareholders (holding about 52% of our outstanding shares). Although not all shareholders accept our invitation, we held meetings with shareholders representing more than 16% of our outstanding shares.

In an effort to align our compensation programs with the interests of shareholders, improve the relationship between pay and performance, better tie our executive compensation programs to our business strategies, and drive the right executive behaviors, the following summary of incentive design changes were proactively made to FirstEnergy’s incentive programs beginning with awards granted in 2018.

 

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Our Responses in 2018 to Shareholder Feedback

 

   
Shareholder Feedback   2018 Actions(1)
Shareholders want pay for performance alignment; metrics should drive Company strategy and long-term shareholder value  

•  Continued the freeze on base salaries and target opportunity levels as a percentage of base salary, in the aggregate, for short-term and long-term incentive compensation for Section 16 Insiders (excluding promotions) to increase focus on performance and pay alignment.

 

•  With the support of the Compensation Committee and the Board, in 2017 Mr. Jones voluntarily reduced his FE STIP opportunity (120% to 115%) and FE LTIP opportunity (600% to 545%) to levels established in 2015, which reduction continued for his 2018 and 2019 compensation.

 

•  Linked programs to key drivers of shareholder value:

 

•  FE STIP tied to a funding “gate” based on Operating Earnings in 2018;

 

•  FE LTIP tied to Operating Earnings per Share (“Operating EPS”) and Capital Effectiveness, both of which are strong indicators of shareholder value in the utility industry; and

 

•  External segment reporting is consistent with the internal financial reports to regularly assess performance of the business and allocate resources.

 

•  Re-designed the FE LTIP:

 

•  Included a Relative Total Shareholder Return (“RTSR”) modifier, which will increase or decrease the LTIP payout based on performance against companies in the S&P 500 Utilities Index to enhance link to shareholder value; and

 

•  Incorporated a TSR cap (if absolute TSR is negative over the three-year LTIP period, the payout will be capped at 100%).

 

•  In order to further align the previously awarded FE LTIP cycles for 2016-2018 and 2017-2019 with long-term shareholder value, added an absolute TSR cap for Messrs. Belcher, Jones, Pearson, Strah, and Ms. Vespoli that will limit the FE LTIP maximum possible payouts as follows:

 

•  Capped at 100% if the absolute TSR is negative over the respective three-year performance periods;

 

•  Based on a continuous function for absolute TSR growth between 0% and 8% for the 2016- 2018 cycle and 0% and 10% for the 2017-2019 cycle; and

 

•  Paid as earned (up to the max of 200%) if the absolute TSR growth over the performance period is greater than 8% and 10%, respectively.

 

•  The calculation will use the average stock price for the month of December (i.e., December 2015 and December 2018 for the 2016-2018 cycle and December 2016 and December 2019 for the 2017-2019 cycle) and will assume dividends are reinvested.

 

•  Maintained current caps on FE STIP (maximum payout 150%, which is a more conservative position compared to the Utility peer group), and FE LTIP (maximum payout 200%, which is in line with the Utility peer group).

Shareholders prefer performance-based vs. time-based awards  

•  Continued focus on 100% performance-based long-term incentives, a leading practice compared to our peer groups.

 

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Shareholder Feedback   2018 Actions(1)
Shareholders prefer 3-year cumulative vs. successive annual performance periods for the long-term incentive plans  

•  Eliminated the annual goal-setting approach in the FE LTIP and moved to establishing 3-year cumulative goals focused on an Operating EPS KPI tied to Regulated Distribution, Regulated Transmission and Corporate/Other and 3-year Average Capital Effectiveness;

 

•  Included a 3-year RTSR modifier with an absolute TSR cap; and

 

•  Simplified the LTIP structure and eliminated the annual accumulation of points over the 3-year cycle in favor of cumulative metrics.

Goals need to be set rigorously and the process needs to be transparent  

•  Maintained additional stretch-level performance measure through goal setting process. As an example, in the 2018 FE STIP, added $0.06 cents to the stretch-level KPI Operating EPS above what was communicated to investors in November 2017;

 

•  Improved calibration of payout to performance levels to better align pay with performance; and

 

•  Enhanced the financial goal setting process with the Compensation Committee by including detailed reconciliations and conducting an independent assessment of the rigor of incentive compensation performance goals for their reasonableness and competitiveness.

STIP and LTIP metrics should be relevant to the business and not overlapping  

•  FE STIP incorporates a financial Operating Earnings goal, operational goals, safety goals, and D&I goals;

 

•  Replaced the FE STIP pool funding approach with a threshold financial performance hurdle for the FE STIP ensuring that financial performance is met before operational performance is rewarded;

 

•  FE LTIP incorporates an Operating EPS goal, Capital Effectiveness goals, and a RTSR modifier; and

 

•  Eliminated the one remaining overlapping metric – safety – in the FE LTIP, and increased the weighting on safety KPIs in FE STIP.

 

(1) 

Refer to the CD&A Glossary of Terms on page 67 for definitions.

Governance of our Executive Compensation Programs

 

 

Compensation Philosophy

The primary objectives of our executive compensation programs are to:

 

   

Attract, retain, focus and reward talented executives who drive our success in the highly complex utility industry by offering competitive total compensation for our executives overall;

   

Promote the long-term financial health of the business, and the creation of value for the sustained benefit of shareholders, by emphasizing long-term incentives in the pay mix;

   

Seek to calibrate pay to performance to ensure that the interests of our executives and shareholders are aligned, such that 50th percentile compensation is realized for strong corporate performance, above 50th percentile compensation is realized for exceptional performance, and below 50th percentile compensation is realized for below expected performance;

   

Tie executive awards to corporate results as well as to overall business unit performance to hold executives accountable for their areas of responsibility;

   

Recognize individual contributions, including individual performance, experience, and future potential in determining actual pay levels to help ensure that your Company retains our most critical talent; and

   

Conduct ourselves in a way that comports with standards of good governance, consistent with creating long-term value for shareholders.

 

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What We Do and Don’t Do

We continually strive to make improvements to our executive compensation plans and programs. Below is a summary of what we do and don’t do with respect to executive compensation, the totality of which we believe aligns with the long-term interests of our shareholders and with commonly viewed best practices in the market:

 

   
What We Do    What We Don’t Do

 

Pay-for-performance

 

•  FE LTIP is 100% at risk, with no solely time-based vesting requirements

 Caps on short-term and long-term incentive awards

 

•  Eliminated the prior “Pool of Funds” approach for 2018 FE STIP and implemented a threshold financial performance hurdle

 

   The Company must achieve threshold-level achievement for the Operating Earnings before any STIP award is paid

 

•  Individual short-term incentive awards capped at 150% (vs. industry caps at 200%)

 

•  Individual long-term incentive awards capped at 200% (consistent with the industry)

 

 Non-overlapping financial performance measures in our short- and long-term incentive plans

 

 Combination of absolute and relative performance goals

 

 Robust stock ownership guidelines

 

 Clawback policy

 

 Mitigate undue risk through compensation design, corporate policies, and effective governance

 

 Annual Say-on-Pay vote

 

 Double-trigger CIC provisions

 

 Independent compensation consultant for the Compensation Committee comprised of only independent directors

 

 Beginning in 2018, cap on LTIP payouts if absolute TSR over the performance period is negative

  

 

LOGO    No executive hedging or pledging allowed

 

LOGO    No employment agreements

 

LOGO    No tax gross-ups for our NEOs

 

LOGO    No repricing of underwater stock options without shareholder approval

 

LOGO    No excessive perquisites

 

LOGO    No payment of dividends on unearned shares

 

LOGO    No new entrants in the SERP – SERP closed since 2014

Role of our Compensation Committee, Management and Compensation Consultant

The Compensation Committee is responsible for overseeing executive compensation and making recommendations to the Board for establishing appropriate salary and incentive compensation for our executive officers, including our NEOs, in accordance with our compensation philosophy, while also aligning our executives’ interests with Company and business unit performance, business strategies, and drivers for growth in shareholder value. The Compensation Committee is further responsible for administering our compensation plans in a manner consistent with these objectives. In this process, the Compensation Committee evaluates information provided by its independent compensation consultant and our CEO, as discussed below. During 2018, the Compensation Committee engaged the services of Farient Advisors (“Farient”) as the Compensation Committee’s independent compensation consultant. The Compensation Committee reviews the mix and level of compensation by each component individually and in the aggregate. The Compensation Committee, using tally sheets and accumulated wealth summaries, also reviews current and previously awarded but unvested compensation.

 

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Management identifies high-potential executive successors, including a focus to identify high-performing, diverse leaders. Your Company’s talent philosophy is that all leaders, regardless of level, must demonstrate the ability to motivate future performance, be accountable for their behaviors and results, and enable employees to do their best every day. Executive succession topics are reviewed periodically by the CEO, the Senior Vice President, Human Resources and Chief Human Resource Officer and the Compensation Committee. Executive succession plans are previewed by the Compensation Committee, as applicable, and with the full Board at its annual strategy retreat. Consistent with the D&I initiative, the Compensation Committee has emphasized social responsibility at your Company, introducing goals related to diversity and inclusion beginning in 2018.

With respect to our CEO’s compensation, the Compensation Committee also annually:

 

   

Reviews, determines, and recommends to the Board the Company’s goals and objectives with respect to CEO compensation; and

 

   

Makes compensation recommendations to the Board for its approval or ratification based upon the CEO’s performance, competitive compensation benchmarking survey data and the utility peer group proxy data.

The Compensation Committee and Board are responsible for establishing the compensation of the NEOs. Neither the CEO nor any other NEO makes recommendations for setting his or her own compensation. The recommendation of the CEO’s compensation is determined in Compensation Committee meetings during an executive session and is presented to the independent members of your Board for review and approval. Annually, the Compensation Committee also reviews the goals and targets of the incentive compensation programs with a focus on setting challenging, but realistic, targets to drive performance and to improve shareholder value over the long term.

The CEO, with guidance from Human Resources, typically makes recommendations to the Compensation Committee with respect to the compensation of the other NEOs and the other Section 16 Insiders. The CEO possesses insight regarding individual performance, experience, future promotion potential, and intentions in retaining particular senior executives. The CEO presents his recommendations to the Compensation Committee for review. However, the Compensation Committee may modify or disregard the CEO’s recommendations. Farient, as discussed below, regularly provides market-level commentary and observations regarding compensation adjustments to the Compensation Committee.

The Compensation Committee also engaged Farient to provide independent advice with respect to executive and director compensation and corporate governance matters related to executive compensation. The Compensation Committee relied on Farient’s expertise in benchmarking and familiarity with competitive compensation practices in the utility and general industry sectors. In addition, the Compensation Committee regularly requested advice from Farient concerning the design, communication, and implementation of our incentive compensation plans and other programs. In 2018, the Compensation Committee elected to meet with Farient without management (including the CEO) present, in an executive session after most of the regularly scheduled Compensation Committee meetings.

The services provided by Farient to the Compensation Committee in 2018 include:

 

   

Review of our compensation philosophy, including the alignment of our executive compensation practices with our compensation philosophy and assessing potential changes to address trends in market practice and shareholder expectations;

 

   

Review of our peer groups used for compensation benchmarking purposes for executives and directors;

 

   

Independent assessment and review of the rigor of incentive compensation performance goals and the goal setting process, including:

 

     

Evaluating historical, recent and projected performance;

 

     

Reviewing analyst estimates to understand external expectations;

 

     

Analyzing historical and projected peer data; and

 

     

Calculating the probability of achievement of targets to assess the competitiveness of goals.

 

   

Analysis of competitive compensation practices for executives and directors within our peer groups;

 

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Review of the description of our executive compensation practices in our annual proxy statement and apprising the Compensation Committee of its recommendations and necessary changes;

 

   

Review of share ownership guidelines;

 

   

Review of all aspects of our STIP and LTIP plan designs, including measures, weightings, leverage, and equity mix;

 

   

Review of CIC benefits to help ensure alignment with our compensation philosophy and competitive practice;

 

   

Regularly informing the Compensation Committee of legislative and regulatory changes, market trends and current issues with respect to executive compensation and educating members on our processes, plans and programs; and

 

   

Preparation for and attendance at all Compensation Committee meetings, including executive sessions, if applicable and as needed.

The Compensation Committee obtained and considered representations from Farient that they were an independent consultant and that there were no conflicts of interest. The Compensation Committee has considered the independence of Farient, as required by SEC and NYSE rules and requirements. The Compensation Committee also considered and assessed relevant factors that could give rise to a potential conflict of interest with respect to Farient and their work. Based on this review, the Compensation Committee is not aware of any conflict of interest that has been raised by the work performed Farient.

Benchmarking

The Compensation Committee uses competitive benchmarking data to evaluate compensation practices and develop compensation recommendations for each of the Section 16 Insiders, including the NEOs. The Company uses a combination of a utility peer group and a general industry peer group to provide an overall competitive total rewards package. Employee and executive compensation, executive benefits and perquisites, broad-based benefits (retirement benefits, death benefits, long-term disability and health care) and director compensation are all benchmarked against the same peer groups. The Compensation Committee uses competitive “blended” market data (i.e., the average of the revenue-regressed 50th percentile of our utility peer group and general industry peer group, referred to as the “Blended Median”) to set compensation levels and to determine any adjustment to assess the competitiveness of the base salary, short- and long-term target incentive opportunities and total target compensation, and considers a range of 80% to 120% of the Blended Median for each component of pay to be competitive.

In 2017, a comprehensive peer group review was performed in which the peer groups were selected and comprised of a utility peer group of 22 companies and a general industry peer group of 45 companies. With the exception of periodic merger and acquisition activity, our utility peer group has remained consistent and generally unchanged over the last 10 years. The Compensation Committee selected the 2018 peer groups based on the following criteria, and the peer groups remained unchanged from the group identified for 2017:

 

   

Included companies with revenues between $8 and $30 billion (a range of approximately 0.5 to 2.0 times our revenue) with whom we compete for talent;

 

   

Excluded companies and industries whose compensation or business models significantly differ from utilities, such as financial services, health care, retail, franchise, media and companies that are internationally headquartered; and

 

   

Included a few select companies outside of the revenue scope based on their close geographic proximity to your Company.

 

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Due to merger and acquisition activity, EMC Corp has been removed from the general industry peer group for 2018. As a result, the peer groups for 2018 included the following 22 utility peer companies and 43 general industry peer companies:

 

 

2018 Utility Peer Group

 

AES CORPORATION

AMEREN CORP

AMERICAN ELECTRIC POWER CO INC

CENTERPOINT ENERGY INC

CMS ENERGY CORP

CONSOLIDATED EDISON INC

DOMINION RESOURCES INC

DTE ENERGY CO

 

DUKE ENERGY CORP

EDISON INTERNATIONAL

ENTERGY CORP

EVERSOURCE ENERGY

EXELON CORP

NEXTERA ENERGY INC

NISOURCE INC

  

NRG ENERGY

PG&E CORP

PPL CORP

PUBLIC SERVICE ENTERPRISE GROUP

SEMPRA ENERGY

SOUTHERN CO

XCEL ENERGY INC

 

 

2018 General Industry Peer Group

 

3M COMPANY

AIR PRODUCTS & CHEMICALS INC

ALCOA INC

AUTOMATIC DATA PROCESSING INC

BAXTER INTERNATIONAL INC

BRISTOL MYERS SQUIBB CO

COLGATE PALMOLIVE CO

CONAGRA FOODS INC

CUMMINS INC

CSX CORP.

EATON CORP

ECOLAB INC

ELI LILLY & CO

EMERSON ELECTRIC CO

GENERAL MILLS INC

 

GENUINE PARTS CO

GOODYEAR TIRE & RUBBER CO

HALLIBURTON CO

HONEYWELL INTERNATIONAL INC

ILLINOIS TOOL WORKS INC

INTERNATIONAL PAPER CO

JABIL CIRCUIT INC KELLOGG CO

KIMBERLY CLARK CORP

L 3 TECHNOLOGIES, INC

MOSAIC CO

NAVISTAR INTERNATIONAL CORP

NORFOLK SOUTHERN CORP

NORTHROP GRUMMAN CORP

ONEOK INC

  

OWENS CORNING

PACCAR INC

PARKER HANNIFIN CORP

PPG INDUSTRIES INC

PROGRESSIVE CORP

QUALCOMM INC

RAYTHEON CO

STRYKER CORP

TEXTRON INC

THE SHERWIN WILLIAMS CO

UNION PACIFIC CORP

WASTE MANAGEMENT INC

WHIRLPOOL CORP

XEROX CORP

In February 2018, at the Compensation Committee’s request, Farient accumulated benchmark compensation data for our peer companies based on Willis Towers Watson executive surveys and AonHewitt’s Total Compensation Measurement database, and determined that our executives’ total direct compensation, in the aggregate, continues to be positioned at approximately the 50th percentile of the market. The total compensation for our NEOs, in the aggregate, is 94% of the Blended Median, which is within the competitive range of 80% to 120%.

 

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Components of Total Direct Compensation Programs

 

 

Key Elements of 2018 Executive Compensation

The key elements of our executive compensation program to attract, retain and motivate key executive leaders are described below:

 

Element

 

 

Description

 

 

Key Characteristics and Considerations

 

     
Base Salary   Bi-weekly, fixed cash compensation designed to reward strong past performance and motivate strong performance in the future  

§ The Compensation Committee uses the Blended Median to set base salary levels and determine any adjustments

 

 Other factors including individual experience, performance, and impact by role, and historical compensation adjustments for the NEO may also be considered

 

§ The Compensation Committee, CEO and Board annually review each NEO’s base salary

     
FE Short-Term Incentive Program (FE STIP) – Excluding Schneider   Variable cash compensation designed to reward the achievement of near-term corporate and business-unit objectives based on financial, operational, safety and D&I performance measures  

§ The Compensation Committee uses the Blended Median and internal equity to set target opportunity levels

 

§ Completely at-risk compensation and 100% performance-based

 

§ Payouts may range from 0% to 150%

 

§  For 2018, the FE STIP goals included:

 

 Financial: Operating Earnings and business unit financial performance

 

 Operational: Includes a mix of customer, reliability and environmental operating metrics

 

Safety: Includes OSHA reportable incidents, LCEs and DART Rate

 

D&I: Includes diverse succession planning, diverse professional hiring, and improvement on inclusion survey scoring

 

§ A threshold financial performance hurdle must be reached based on Operating Earnings (as defined below on page 68)

 

§ Weightings for NEOs are financial (60%-70%) and operational, including safety and D&I (30%-40%)

 

     
FE Long-Term Incentive Program (FE LTIP) – Excluding Schneider   Variable cash (1/3) and equity (2/3) compensation designed to reward the achievement of longer-term goals and drive shareholder value and growth  

§ The Compensation Committee uses the Blended Median and internal equity to set target opportunity levels

 

§ Completely at-risk compensation and 100% performance-based consisting of performance-adjusted RSUs

 

§ The 2018-2020 cycle of the FE LTIP vests after a three-year performance period based on the achievement of two financial KPIs over the performance period, which are weighted equally:

 

Operating EPS Growth (cumulative)

 

Capital Effectiveness Index (average)

 

§ RTSR modifier may increase or decrease payout up to 25% based on performance against companies within the S&P 500 Utility Index

 

 Includes a payout cap (100% target) if absolute TSR is negative over three-year performance period

 

§ Payouts may range from 0% to 200% of target opportunity

     
2018 FES Annual Incentive Program (AIP) – Schneider Only   1-year variable cash compensation plan that was completely at risk and based on the achievement of FES-based KPIs  

§ The Compensation Committee was not required to approve the AIP payouts as the 2018 AIP is governed by the independent FES and FENOC Boards; however, the Compensation Committee regularly reviewed updates on payout results as Mr. Schneider is a NEO.

 

§  Represents a combination of two-thirds of what would otherwise have been granted under the FE LTIP target opportunity and 100% of what would otherwise have been granted under the FE STIP opportunity. See the section below titled “2018 Annual Incentive Program (AIP) including Mr. Schneider” for more information.

 

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Compensation Mix

We review our compensation philosophy, pay mix and pay vehicles for our NEOs annually to ensure that they support our strategy and align with shareholder interests. The Compensation Committee sets our overall compensation levels consistent with the Blended Median but provides a greater portion of target pay in the form of performance-based LTIP awards compared to our peer groups. Under our compensation design, the percentage of pay that is based on performance increases as the executives’ responsibilities increase. As shown in the charts below, of base salary, STIP and LTIP, approximately 87% of the CEO’s total target pay and 75% of our NEO average target pay, other than Mr. Schneider, was performance-based, and approximately 72% of the CEO’s total target pay and 55% of our NEOs’ average target pay, other than Mr. Schneider, was predicated on long-term performance in 2018. A separate chart for Mr. Schneider is also provided below to reflect the different compensation programs for him in 2018.

 

CEO 2018 Pay Mix at Target  

Other NEOs (excluding Mr. Schneider)

2018 Pay Mix at Target

  Mr. Schneider’s 2018 Pay Mix
at Target

 

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Determination of Compensation for 2018

2018 Target Compensation (Base Salary + Incentive Compensation)

In January 2018, the Compensation Committee reviewed a competitive benchmarking analysis prepared by Farient. This report assessed each NEO’s compensation levels and mix against the Blended Median. The Committee determined that the NEOs, in the aggregate, were well-positioned against the competitive Blended Median (within the 80% to 120% competitive range) and the Board approved and ratified for the second consecutive year, no increase in base salary and target opportunity levels as a percent of 2018 base salary, in the aggregate, for short-term and long-term incentive compensation in 2018, other than for promotions.

For 2018, target opportunities continued to be set at or near the Blended Median of our peer groups. 2018 target compensation levels for the NEOs were as follows:

 

Executive   2018 Base
Salary
 

2018 Target

Opportunity STIP
(% of Salary)

 

2018 Target

Opportunity

LTIP Awards

(% of Salary)(3)

 

2018 Target

Opportunity

AIP
(% of Salary)

 

2018 Target

Total

Compensation

           

Mr. Jones

  $1,133,000   115%   545%   N/A   $8,610,800
           

Mr. Strah(1)

  $600,000   75%   235%   N/A   $2,460,000
           

Mr. Pearson

  $660,400   90%   320%   N/A   $3,368,040
           

Ms. Vespoli

  $759,200   85%   255%   N/A   $3,340,480
           

Mr. Belcher(1)

  $565,000   70%   180%   N/A   $1,977,500
           

Mr. Gaines

  $440,840   65%   125%   N/A   $1,278,436
           

Mr. Schneider(2)

  $535,000   N/A   N/A   193.333%   $1,569,333

 

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(1)

Reflects annualized increases in base salary and target opportunity levels as a percent of base salary as a result of promotions effective March 5, 2018. Prior to their promotions, salaries were $560,000 for Mr. Strah and $456,435 for Mr. Belcher.

(2)

Mr. Schneider participated in the 2018 AIP, consistent with employees at FES, under which he earns and receives cash payouts on a quarterly basis. For 2018, Mr. Schneider was granted a target AIP award opportunity equal to 2/3 of what would otherwise have been granted under the 3-year FE LTIP Award and 100% of what would otherwise have been granted under the FE STIP Award.

(3)

Mr. Jones, Mr. Strah, Mr. Pearson, Ms. Vespoli, Mr. Belcher and Mr. Gaines will have 1/3 of their FE LTIP paid in cash and 2/3 paid in stock.

The maximum payout under the FE STIP is 150% of an individual’s target opportunity, which is below our Utility peer group. The maximum payout under the FE LTIP is 200% of an individual’s target opportunity, which is consistent with our Utility peer group. However, unlike market practices, the FE LTIP is 100% performance-based. The NEOs may earn payments that are below their target opportunities if the Company falls short of its pre-established goals and may earn above their target opportunities if the Company performs above its pre-established goals. Except in limited circumstances as described in the plan documents, the Compensation Committee may use negative discretion to make downward adjustments to awards based on a formula or discretionary basis but may not make upward adjustments.

2018 Incentive Compensation Programs

Shareholders previously approved the 2007 Incentive Plan and 2015 Incentive Compensation Plan (the “Incentive Compensation Plans”). The purpose of the Incentive Compensation Plans is to promote the success of FirstEnergy by providing incentives to certain employees and directors that link their personal interests to the long-term financial success of the Company and to help increase shareholder value, providing for various types of awards including equity and equity-based awards and cash-based awards.

2018 FE Short-Term Incentive Program (FE STIP)

The FE STIP provides annual cash awards to executives whose contributions support the achievement of the Company’s identified financial and operational KPI goals, which are linked to the Company’s business strategy and objectives. The Compensation Committee annually reviews the goals and targets with a focus on setting challenging but realistic targets that are intended to align with shareholder value.

The Compensation Committee annually establishes the KPIs under the FE STIP that must be satisfied for a NEO to receive an award for such performance period and recommends that the Board approve the relative weightings for each KPI with respect to each participating NEO.

In February 2018, the Compensation Committee recommended, and the Board approved the following changes for the 2018 FE STIP:

 

   

Refocused the FE STIP on an Operating Earnings KPI (shifting the Operating EPS goal to the FE LTIP);

 

   

Increased the weighting of safety metrics to 15% in FE STIP to promote a Company focus on safety, while eliminating safety in the FE LTIP to better align with market practice and so as not to duplicate measures;

 

   

Enhanced the safety KPI by incorporating DART Rate and LCEs, while also maintaining OSHA Recordable Incidents as a metric;

 

   

Added KPI goals tied to a D&I metric, weighted at 10%, for all managers and above (including the NEOs); and

 

   

Replaced the previous Pool of Funds approach with a simpler financial performance threshold for the 2018 FE STIP requiring that financial performance as measured by Operating Earnings is met before operational performance is rewarded.

Beginning in 2018, due to the Tax Cuts and Jobs Act, the Executive STIP was no longer necessary to align with IRC Section 162(m) and was eliminated. As a result, the NEOs participated directly in the FE STIP, which is a broad-based incentive compensation program.

FE STIP payouts are driven by financial, operating, safety, and D&I metrics, with 70% of the CEO’s opportunity and 60% of the other NEOs’ opportunities tied to corporate and business unit financial performance and the remaining opportunities tied to operating, safety and D&I metrics. The Operating Earnings threshold of $1,071 million, including the cost of the STIP, must be achieved before a payout is made.

 

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Based on the 2018 year-end Operating Earnings result of $1,264 million, the FE STIP payout was $143.7 million. Because the threshold of Operating Earnings was achieved, at $1,071 million, the 2018 FE STIP payout was paid as earned in accordance with the financial performance, and operational, safety, and D&I performance against KPIs.

2018 KPIs and Weightings for FE STIP (Excluding Mr. Schneider)

The Compensation Committee reviewed, and the Board approved, the FE STIP performance metrics and weightings for each of the NEOs at a February 2018 meeting. For 2018, the NEOs had the following metrics and weightings (excluding Mr. Schneider who participated in the 2018 AIP).

 

       
KPI Measures(1)   Rationale   CEO   All Other
NEOs

Financial

Operating

Earnings

 

•  Drives shareholder value while providing greater focus on driving the regulated distribution and transmission businesses

•  Increases in Operating Earnings indicate growth and efficiency of the business

•  Provides a consistent and comparable measure of performance to help shareholders understand performance trends

 

  70%   60%

Operational

FE Shared Service O&M  

•  Monitors spending and focuses on overall cash flow and liquidity within FE Shared Services

  N/A  

 

10%
(excluding
Belcher)

 

 

Controllable Regulated Distribution / Regulated Transmission and Regulated Fossil Generation O&M

 

 

•  Monitors spending and focuses on overall cash flow and liquidity within the regulated distribution, transmission and fossil generation businesses

  10%
(Belcher
only)
Operations Index  

•  Based on six key operating metrics equally weighted

•  Focused on customer service, reliability and environmental metrics that drive the Company’s long-term success

 

  5%

Safety (2)

Systemwide OSHA  

•  A core value of the Company

•  Measured for the Company and each business unit and is a KPI for all employees

•  Based on three key metrics that are equally weighted: OSHA reportable incidents, systemwide LCEs and DART Rate

•  Expanded safety metrics to include LCEs and DART Rate to consider severity of injuries and drive better conversations with employees

  10%  

 

10%
(excluding
Belcher)

 

 

Systemwide DART

 

 

Regulated Distribution / Regulated Transmission OSHA

 

  N/A   10%
(Belcher
only)

 

Regulated Distribution / Regulated Transmission DART

 

Systemwide LCEs

 

 

 

5%

 

Diversity & Inclusion

Diversity and Inclusion Index  

•  Integral part of a successful revenue generating business and innovation

•  Based on three key metrics that are equally weighted

•  Measures diverse succession planning, diverse hiring, and improvement on inclusion survey scoring

 

  10%

 

(1)

Refer to the CD&A Glossary of Terms on page 67 for definitions.

(2)

Under the “Fatality Reduction Rule”, in the event of a fatality of an employee (other than certain no-fault fatalities), all participating NEOs will not receive a FE STIP payout with respect to the Safety KPI.

 

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“Threshold,” “Target,” and “Stretch” levels are established for the KPIs based on Operating Earnings and achieving continuous improvement in safety and operational performance. In 2018, the Threshold, Target, Stretch and actual KPI results under the FE STIP for the NEOs were:

 

2018 STIP Goal Ranges(1)
2018 KPI Measures(2)   Threshold   Target     Stretch     Actual Result     Result
           

Financial

                   

Operating Earnings

  $1,071     $1,151       $1,261       $1,264     Meets Stretch

Operational

                   

FE Shared Service O&M (participating

NEOs other than Jones and Belcher)

  $537     $532       $521       $458     Meets Stretch

Controllable Regulated Distribution/Regulated Transmission and Regulated

Fossil Generation O&M (only Belcher)

  $1,226     $1,214       $1,190       $1,195     Meets Target

Operations Index

  3.00     6.00       9.00       6.55     Meets Target

Safety

                               

Systemwide OSHA Recordable

Incidents

  1.22     0.82       0.55       0.80     Meets Target

Regulated Distribution/Regulated Transmission OSHA Recordable Incidents

  1.46     0.98       0.64       0.88     Meets Target

Systemwide LCE

  2     1       0       0     Meets Stretch

Systemwide DART Rate

  0.67     0.39       0.25       0.45     Meets Threshold

Diversity and Inclusion

                               

Diversity & Inclusion Index

  1.50     3.00       4.50       1.20     Below Threshold

 

(1)

Interpolated for performance between discrete points. Refer to page 55 for details regarding 2018 payout.

(2)

Refer to the CD&A Glossary of Terms on page 67 for definitions.

FE LTIP Awards in 2018 (for NEOs other than Mr. Schneider)

In February 2018, the Compensation Committee recommended, and the Board approved substantial changes to the FE LTIP to better align this program to shareholder value creation. The changes included modifying financial goals to focus on the regulated businesses, moving to a cumulative three-year performance period for measuring goals, and adding a relative shareholder performance measure. See the chart below on page 52, which identifies the KPI measures under the 2018 FE LTIP for more information.

The FE LTIP is comprised entirely of performance-adjusted RSUs with 2/3 of the earned award payable in stock and 1/3 of the earned award payable in cash. Both the stock-settled and cash-settled portions of the performance-adjusted RSU awards have a minimum payout of 0% and a maximum payout of 200% based on a formulaic structure where actual performance results are evaluated against the threshold, target and stretch performance goals over a three-year performance period. Performance results are interpolated on a straight-line basis between the minimum payout and maximum payout. The RTSR modifier is applied to the formulaic result for the payout percentage to determine the final payout amount.

The Compensation Committee and Board approved the FE LTIP grants at their regularly scheduled meeting in February 2018. For 2018, the grant date for performance-adjusted RSUs for both the stock-settled and cash-settled portions of the awards was March 5, 2018. We use the target LTIP award by individual divided by the average of the high and low prices of our common stock as of the date of grant to determine the number of units comprising each NEO’s award of performance-adjusted RSUs. Any equity grants awarded in proximity to an earnings announcement or other market event are coincidental.

The “Grants of Plan-Based Awards in Fiscal Year 2018” table provides the target number of performance-adjusted RSUs granted to each NEO in 2018 based on the percentage of base salary provided earlier in the CD&A. Additional details regarding the 2018-2020 LTIP grants are provided in the narrative following the “Grants of Plan-Based Awards in Fiscal Year 2018” table.

 

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The 2018 FE LTIP uses two performance measures, weighted equally: Cumulative Operating EPS and Average Capital Effectiveness. These performance measures support continued financial improvement and increase focus on earnings across the Company’s regulated businesses. The KPIs used for performance-adjusted RSUs under the FE LTIP in 2018 were based on:

 

     

 

Program

 

 

 

KPI Measures(1)

 

 

 

Rationale

 

FE LTIP   Cumulative Operating EPS   A non-GAAP measure of the financial performance of business units’ contribution to Operating Earnings growth over the 2018-2020 cycle.
  Average Capital Effectiveness   A non-GAAP measure of the financial return effectiveness on our capital investment in operational assets of the business units’ over the 2018-2020 cycle.

 

(1)

Refer to the CD&A Glossary of Terms on page 67 for definitions.

The performance goals for the performance period are based on:

 

2018 LTIP Goal Ranges
       
2018 Financial KPIs    Threshold    Target    Stretch

Cumulative Operating EPS

   $6.47    $7.00    $7.59

Average Capital Effectiveness

   3.87%    4.19%    4.54%

The RTSR modifier is calculated over the three-year performance period as compared against the S&P 500 Utility Index. The modifier operates as follows:

 

  -  

Plus 25%, up to the maximum of 200% will be earned if upper quartile RTSR performance is achieved;

 

  -  

Minus 25% if lower quartile RTSR performance is achieved; and

 

  -  

Between the lower and upper quartile RTSR performance, a continuous function will be utilized to determine the modifier percentage.

If the Company’s absolute TSR is negative for the three-year cumulative performance period of 2018-2020, the LTIP awards are capped at a target opportunity level of payout (100%).

Performance-Adjusted Restricted Stock Unit Award (“Transition Award”) including Mr. Belcher

A 2018-2019 Transition Award was approved by the Compensation Committee and the Board at the February 2018 meeting and was provided to certain executives, including Mr. Belcher, who were previously participants in the FES/FENOC 2017 FES Replacement Long-Term Incentive Plan (“FES R-LTIP”) and were appointed to positions within FE Service Company effective March 5, 2018. The previous FES 2017 R-LTIP was an annual cash-based program in effect for fiscal 2017 with a target opportunity percentage equal to one-third (1/3) of what otherwise would have been granted under the FE LTIP for 2017-2019 cycle. The 2018-2019 Transition Award was provided to replace the value of the 2018-2019 portion of the FE LTIP and make the participants whole on the FE LTIP grant for the 2017-2019 cycle.

The KPIs and results for the Transition Award are based on the 2018-2019 performance under KPIs used for the 2017-2019 FE LTIP grant. As the FES R-LTIP was provided as a cash payment in 2017, the Transition Award will be settled entirely in stock to more closely align with the FE LTIP grant for the 2017-2019 cycle, in which awards are settled two-thirds in stock and one-third in cash. The grant date used for the Transition Award was March 5, 2018 with the grant value equaling two-thirds of the target opportunity percentage and base salary in effect as of March 1, 2017, as reflected in the “Grants of Plan Based Awards in Fiscal Year 2018” table on page 72.

Key Employee Retention Plan (“KERP”) including Mr. Belcher

On January 26, 2017, Mr. Belcher received a one-time retention-based award to incentivize him to remain employed with FENOC and to maintain business continuity to ensure the achievement of strategic business

 

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initiatives related to the exit of commodity-exposed generation. The KERP award provides a cash payment in the event Mr. Belcher transfers to another position within FirstEnergy and had a scheduled vest date of November 30, 2018. On February 19, 2018, the FES and FENOC Boards approved the transfer of Mr. Belcher from FENOC President & CNO to his current position as Senior Vice President and President, FirstEnergy Utilities.

As recommended by the Compensation Committee, and approved by your Board and by the FES and FENOC Boards, Mr. Belcher received a cash payment, based on the vesting criteria of the KERP of $434,700 on November 30, 2018 under the KERP award.

2018 Annual Incentive Program (AIP) including Mr. Schneider

In 2018, for the second consecutive year, the board of directors of FES approved an annual incentive compensation program for eligible FES participants, including Mr. Schneider. Mr. Schneider’s total target AIP opportunity was 193.333% of base salary of $535,000, which equates to $1,034,333. All NEOs and Section 16 Insiders, except for Mr. Schneider, participated in the FE STIP and FE LTIP in 2018. Because the 2018 AIP was based on a one-year performance period, for the second consecutive year (versus three years like the FE LTIP), the incentive target opportunity percentage for 2018 was set equal to two-thirds of what would otherwise be granted under the FE LTIP target opportunity and what would otherwise be granted under the FE STIP opportunity. This results in a relatively equivalent one-year incentive target had he remained in the FE LTIP and STIP programs. Between threshold and stretch performance, payouts range from 0% to 200% of the target opportunity amount, interpolated based on actual achievement against the FES KPIs listed below.

The FES Board set performance goals for FES to reflect the challenging business environment facing FES and were designed to incentivize and retain FES participants to preserve value during the FES Bankruptcy proceedings. The FES measures were designed to monitor spending, drive earnings, reduce FENOC outage time, and continue to focus on safety. All five measures in the AIP were individually weighted and tracked quarterly over the performance period.

 

     

 

Program

 

 

 

KPI Measures(1)(2)

 

 

 

Rationale

 

2018 AIP and FES LTIP for 2018(3)   FES, Competitive Fossil and Nuclear O&M and Capital Spend   This metric is a financial metric that monitors spending and focuses on overall cash flow and liquidity
  Nuclear Unit Capability Factor (“UCF”)   This metric measures nuclear energy generation produced over a given period compared to the potential energy generation over the same period
  Safety — FES, Competitive Fossil and FENOC OSHA Reportable Incidents   This metric reflects our overall safety performance in FES, Competitive Fossil and FENOC and is a core value of our company
2018 AIP   Safety — FES, Competitive Fossil DART Rate   This metric reflects how many workplace injuries occur within the year that required employees to either miss work, receive work restrictions or transfer to another job. This metric is a core value of our company.
  Competitive Generation Environmental Excursions   This metric enhances the level of attention to environmental compliance activities and drives continuous improvements towards reducing the frequency of environmental excursions related to air emissions, water discharges and other unauthorized releases

 

(1)

Refer to the CD&A Glossary of Terms on page 67 for definitions.

(2)

In the event that an LCE occurs within specified business units, employees would have a 5% reduction in their total AIP payout.

(3)

Mr. Schneider also had an outstanding award under the FE LTIP for the 2016-2018 cycle. However, with the use of separate incentive compensation programs for FES participants in both 2017 and 2018, the KPIs and results for both years in the outstanding 2016-2018 cycle under the FE LTIP for FES participants were based on different KPIs. We refer to this outstanding cycle of the FE LTIP for FES participants as the “FES LTIP.” See page 56 for more details.

 

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On May 14, 2018, the Bankruptcy Court overseeing the FES Bankruptcy issued an order requiring changes to the KPI metrics for FES, Competitive Fossil and Nuclear O&M and Capital Spend for May through December 2018 based off a revised 2018 FES budget for its operations. The KPI targets for the same metrics applicable for January through April 2018 remained in place as approved under the original 2018 FES budget. The changes included more rigorous goals for FES, Competitive Fossil and Nuclear O&M and Capital Spend performance tracked on a year-to-date basis as well as revised annual goals.

Below is a chart showing the goals before and after the adjustment:

 

FES Fossil and Nuclear O&M and Capital Spend ($M)
     
    Before Adjustment   After Adjustment

Period

  Threshold   Target   Stretch   Threshold   Target   Stretch

Q1

  $240   $238   $226   $240   $238   $226

Q2 YTD

  $531   $526   $500   $507   $502   $477

Q3 YTD

  $755   $748   $710   $695   $688   $653

Annual

  $1,066   $1,055   $1,022   $1,003   $993   $944

The KPIs shown below reflect the annual goals inclusive of the changes to FES, Competitive Fossil and Nuclear O&M and Capital Spend as required by the Bankruptcy Court:

 

2018 AIP Goal Ranges(1)
2018 AIP Goals(2)     Weighting     Threshold   Target   Stretch  

Actual

Result

  Result
             

FES, Competitive Fossil and Nuclear

O&M and Capital

Spend ($ millions)

  60%   $1,003   $993   $944   $877   Meets Stretch

Nuclear UCF

  15%   91.6%   92.1%   92.6%   94.6%   Meets Stretch

Safety — FES, Competitive

Fossil and FENOC OSHA

Reportable Incidents

  7.5%   0.49   0.29   0.14   0.32   Meets Threshold

Safety — FES, Competitive

Fossil DART Rate

  7.5%   0.17   0.09   0.00   0.11   Meets Threshold

Competitive Generation

Environmental Excursions

  10%   8   6   4   6   Meets Target

 

(1)

Interpolated for performance between discrete points. Refer to the bottom of page 55 for details regarding 2018 payout.

(2)

Refer to the CD&A Glossary of Terms on page 67 for definitions.

Based on the results of the KPIs, the 2018 AIP payout is 173.5%. The 2018 AIP award paid in cash as follows:

 

   

Full year performance projections were estimated at the beginning of the performance period and evaluated each quarter based on such performance that quarter.

 

   

75% of the estimated award earned for results for the first quarter of 2018 were calculated and paid out in cash on June 1, 2018;

 

   

75% of the estimated award earned for results for the second quarter of 2018 were calculated and paid out in cash on July 27, 2018; and

 

   

75% of the estimated award earned for results for the third quarter of 2018 were calculated and paid out in cash on October 19, 2018.

In February 2019, the actual results were recalculated for the entire performance period and the participant was paid the difference in what was paid in the quarterly payments during 2018 and the award amount recalculated in February 2019.

 

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Incentive Compensation Payouts for 2018

FE STIP & AIP Payouts

In February 2019, based on actual 2018 KPI results, the Compensation Committee recommended, and the independent members of the Board (and the FES Board for Mr. Schneider) approved or ratified, the following 2018 short-term incentive award payouts for our NEOs:

 

Executive

2018 Base

Salary

2018 Actual

STIP Award

Payout ($)

2018 Actual

AIP Award

Payout ($)

Payout as a %

of Base Salary

         

Charles E. Jones

$1,133,000 $1,662,674 n/a         147%

Steven E. Strah

$600,000 $574,240 n/a          96%

James F. Pearson

$660,400 $758,454 n/a         115%

Leila L. Vespoli

$759,200 $823,483 n/a         108%

Samuel L. Belcher

$565,000 $506,951 n/a          90%

Bennett L. Gaines

$440,840 $365,657 n/a          83%

Donald R. Schneider(1)

$535,000 n/a $1,794,568         335%

 

(1)

Mr. Schneider participated in the AIP in 2018.

FE LTIP Payouts in 2018 (for NEOs other than Mr. Belcher and Mr. Schneider)

The FE LTIP for the 2016-2018 cycle was under a different design than the current FE LTIP cycle. At the beginning of each year in the award cycle, the KPI goals were set for that year and were scored by points awarded for attaining a specified level of performance for each of the three components. Threshold, Target, and Stretch performance goals were established each year for each KPI. Each component was scored annually against that year’s established goals for a total of nine independent values over the three-year period. Points were accumulated for each annual period in the cycle, with a range from 0 to 4.50 points possible per year. “Target performance” across all three KPIs was set at 3.00 points for the year or 9.00 points in the aggregate for the three-year cycle. Threshold opportunity payout was earned at 5.40 points for the three-year performance period; Target opportunity payout was earned at 6.75 points; 150% of Target opportunity payout was earned at 8.10 points; and maximum opportunity payout (200% of Target) was earned at 12.15 points or above. A KPI achieving above Target performance in one year of the cycle may offset a KPI achieving below Target performance in another year of the cycle.

RSU Index Performance Measures

The RSU Index in our 2016-2018 FE LTIP was comprised of the following three performance measures, weighted in equal thirds: Capital Effectiveness Index, FFO to Adjusted Debt Index and Safety Index.

The details on the KPIs, metrics and results for the 2016 – 2018 cycle of the FE LTIP are illustrated on page 65. Below is a summary of the RSU Index Score for the 2016-2018 performance period:

 

2016-2018 RSU Index Score (FE LTIP)
KPI Measures(1)    Annual
Target
     2016      2017      2018      Total
Points  

Capital Effectiveness Index

     1.00        1.42        1.09        1.50      4.01  

FFO to Adjusted Debt Index

     1.00        1.38        1.28        1.50      4.16  

Safety Index

     1.00        1.50        0.84        1.04      3.38  

Totals

              4.30        3.21        4.04      11.55  

 

(1)

Refer to the CD&A Glossary of Terms on page 67 for definitions.

Given that the points were cumulative over each three-year cycle, the performance-adjusted RSUs for the 2016-2018 cycle earned a total of 11.55 points. Based on the total points, the payout was 193% of target

 

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payout opportunity. In March 2019, the performance-adjusted RSUs granted in 2016 were paid in shares of our common stock and cash respectively as follows: Mr. Jones: 296,605 shares and $6,040,333; Mr. Strah: 47,646 shares and $970,292; Mr. Pearson: 92,063 shares and $1,883,613; Ms. Vespoli: 84,470 shares and $1,720,189; and Mr. Gaines: 23,948 shares and $493,551. Any fractional shares for the stock-based performance-adjusted RSUs were paid in cash.

FE LTIP Payout in 2018 for Mr. Belcher

For Mr. Belcher, KPIs and the results for the 2016 year of the outstanding 2016-2018 cycle were based on the corporate performance results under the 2016-2018 FE LTIP, with total points of 4.30 for 2016 (same as above). However, for the 2017 year of the outstanding 2016-2018 cycle under the FE LTIP, the KPIs are the same as those used in the 2017 FES R-LTIP for FES/FENOC participants outlined on page 66, with total points of 4.31. For the 2018 year of the outstanding 2016-2018 cycle, the KPIs and results are based again on corporate performance results under the FE LTIP, with total points of 4.04 (same as above). Mr. Belcher moved back to the FE LTIP KPIs for 2018 due to his promotion to Senior Vice President and President, FirstEnergy Utilities.

The results for the 2016-2018 FE LTIP KPIs for Mr. Belcher were as follows:

 

2016-2018 RSU Index Score (Belcher)
KPI Measures(1)   

Annual

Target

     2016    2017    2018   

Total

Points  

Capital Effectiveness

     1.00      1.42    n/a    1.50    2.92  

FFO to Adjusted Debt

     1.00      1.38    n/a    1.50    2.88  

Safety

     1.00      1.50    n/a    1.04    2.54  

FES, Competitive Fossil and Nuclear O&M and

Capital Spend

     1.00      n/a    1.50    n/a    1.50  

FES, Fossil & FENOC Safety

     1.00      n/a    1.31    n/a    1.31  

Nuclear UCF

     1.00      n/a    1.50    n/a    1.50  

Totals

            4.30    4.31    4.04    12.65  

Given that the points were cumulative over each three-year cycle, the performance-adjusted RSUs for the 2016-2018 cycle for Mr. Belcher achieved stretch performance, earning a total of 12.65 points. Based on the points, the payout for Mr. Belcher was at 200% of target payout opportunity. Payouts under the FE LTIP for Mr. Belcher were made entirely in cash, rather than partially in cash and partially in shares, because of the strategic review of our competitive operations, including FES and FENOC. Although the form of payment of the outstanding stock-based restricted stock units was modified to settle in cash, the awards continued to track the value of the Company’s stock until vesting and payout. As a result, Mr. Belcher received an LTIP payment of $1,320,882 in March 2019 to settle his 2016-2018 FE LTIP award.

FES LTIP in 2018 for Mr. Schneider

As noted earlier, Mr. Schneider also had an outstanding award under the FE LTIP for the 2016-2018 cycle. However, with the use of separate incentive compensation programs for FES participants in both 2017 and 2018, the KPIs and results for both years in the outstanding 2016-2018 cycle under the FE LTIP for FES participants were based on different KPIs. We refer to this outstanding cycle of the FE LTIP for FES participants as the “FES LTIP.”

Considering the strategic review of our competitive operations, including FES and FENOC, the FES LTIP payment for the 2016-2018 cycle to FES participants (including Mr. Schneider) was modified to settle in cash, rather than stock. Any points earned in the FES LTIP for fiscal years prior to January 1, 2017, were carried forward. Points earned in 2016 were based on FE corporate goals under the 2016-2018 FE LTIP, with total points of 4.30 for 2016 (same as above). Points earned in 2017 were based on the 2017 FES R-LTIP KPI goals outlined on page 66 and points earned in 2018 were based on the original 2018 AIP KPI goals outlined on page 54. Total points earned for 2017 were 4.31 and the total points earned for 2018 were 3.93 as illustrated below. The payments for the 2016-2018 cycle are based on the total points earned over the respective three-year periods. Although the form of payment of the outstanding stock-settled restricted stock units was modified to settle in cash, the awards continued to track the value of the Company’s common stock until vesting and payout.

 

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The results for the 2018 FES LTIP KPIs for Mr. Schneider are as follows:

 

FES LTIP KPI Measures(1)  

2018

Threshold

 

2018

Target

 

2018

Stretch

 

2018

Results

 

2018 FES

LTIP

Points

           

FES, Competitive Fossil and Nuclear O&M

and Capital Spend ($ millions)

  $1,066   $1,055   $1,002   $877   1.50

FES, Competitive FES Fossil & FENOC

OSHA Recordable Incidents

  0.49   0.29   0.14   0.32   0.93

Nuclear UCF

  91.6%   92.1%   92.6%   94.6%   1.50

Total

                  3.93

 

(1)

Refer to the CD&A Glossary of Terms on page 67 for definitions.

 

2016-2018 RSU Index Score (Schneider)
KPI Measures(1)   

Annual

Target

   2016    2017    2018   

Total

Points

Capital Effectiveness

   1.00    1.42    n/a    n/a    1.42

FFO/Adjusted Debt Index

   1.00    1.38    n/a    n/a    1.38

Safety

   1.00    1.50    n/a    n/a    1.50

FES, Competitive Fossil and Nuclear O&M and

Capital Spend

   1.00    n/a    1.50    1.50    3.00

FES, Competitive FES Fossil & FENOC OSHA

Recordable Incidents

   1.00    n/a    1.31    0.93    2.24

Nuclear UCF

   1.00    n/a    1.50    1.50    3.00

Totals

        4.30    4.31    3.93    12.54

 

(1)

Refer to the CD&A Glossary of Terms on page 67 for definitions.

Given that the points were cumulative over each three-year cycle, the performance-adjusted RSUs for the FES LTIP achieved stretch performance, earning a total of 12.54 points. Based on the points, the payout for Mr. Schneider was at 200% of target payout opportunity. Payouts under the FES LTIP are made entirely in cash, rather than partially in cash and partially in shares. As a result, Mr. Schneider received a FES LTIP payment of $2,734,031 in March 2019.

Outstanding Award Cycles (2017-2019 and 2018-2020)

The NEOs were granted the following number of target RSUs (rounded) in 2017 and 2018 for each three-year FE LTIP cycle, respectively. Although dividend equivalents accrue and are reinvested throughout the performance period, subject to the same restrictions and performance conditions of the underlying awards, they are excluded in the tables below.

 

             
Executive   Number of
Cash-Settled
RSUs
granted  for the
2017-2019
Cycle
  Number of
Stock-Settled
RSUs
granted  for the
2017-2019
Cycle
  Total RSUs
granted for the
2017-2019
Cycle
 

Number of
Cash-Settled
RSUs
granted for  the
2018-2020

Cycle

  Number of
Stock-Based
RSUs
granted  for the
2018-2020
Cycle
  Total RSUs
granted for  the
2018-2020
Cycle
             

Charles E. Jones

  64,661   131,118   195,779   62,906   127,559   190,465

Steven E. Strah

  11,541   23,082   34,623   14,436   29,057   43,493

James F. Pearson

  22,404   44,599   67,003   21,796   43,389   65,185

Leila L. Vespoli

  20,460   40,921   61,381   19,905   39,810   59,715

Samuel L. Belcher(1)

  N/A   10,710(1)   10,710   10,457   20,914   31,371

Bennett L. Gaines

  5,870   11,602   17,472   5,711   11,287   16,998

Donald R. Schneider(2)

  N/A   N/A   N/A   N/A   N/A   N/A

 

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(1)

Mr. Belcher received a 2018-2019 Transition Award as a make-whole grant to replace the value in the 2017-2019 FE LTIP he did not receive as he was a participant in the 2017 FES R-LTIP while employed by FENOC.

(2)

Mr. Schneider participated in the 2017 R-LTIP and 2018 AIP and did not participate in the 2017-2019 and the 2018-2020 cycles of the FE LTIP, respectively.

Given that the 2018-2020 cycle of performance-adjusted RSUs is based on three-year cumulative metrics, the performance is unknown at this time. As outlined above on page 55, the total points to date in the 2017-2019 cycle are currently 7.25 points.

Potential Negative Discretion for the 2016-2018 and 2017-2019 FE LTIP Cycles

To further align pay and performance of the 2016-2018 and 2017-2019 FE LTIP cycles with long-term shareholder value, in February 2018 the Compensation Committee recommended, and the Board approved, the addition of an absolute TSR cap for Mr. Jones, Mr. Strah, Mr. Pearson, Ms. Vespoli, and Mr. Belcher. The absolute TSR cap will limit the FE LTIP maximum possible payouts to 100% if the absolute TSR is negative over the respective three-year performance periods, based on a continuous function for absolute TSR growth between 0% and 8% for the 2016-2018 cycle and 0% and 10% for the 2017-2019 cycle, and will be paid as earned (up to the max of 200%) if the absolute TSR growth is greater than 8% and 10%, respectively.

The calculation uses the average stock price for the month of December (i.e., December 2015 and December 2018 for the 2016-2018 cycle and December 2016 and December 2019 for the 2017-2019 cycle) and assumes dividends are reinvested. Based on the average of FirstEnergy stock prices for December 2018, the average stock price of $38.09 is greater than the goal of $35.53 needed to pay the 2016-2018 LTIP cycle as earned (capped at 200%). Thus, the 2016-2018 FE LTIP cycle was paid as earned.

The Compensation Committee believes this formulaic approach demonstrates your Company’s commitment to our shareholders. The Compensation Committee retains the right to apply negative discretion based on future conditions or unexpected conditions. However, the addition of the absolute TSR cap to the 2016-2018 and 2017-2019 FE LTIP cycles aligns our legacy long-term incentive program design for these executive officers to the new incentive compensation design approved in 2018 and for subsequent years.

Realized Compensation

We provide this alternative view of compensation paid to the NEOs as a supplement to, not as a substitute for, the Summary Compensation Table (“SCT”), because this realized compensation table below illustrates the way our Compensation Committee views the actual compensation earned or received by our NEOs in 2018 under the FE STIP, the 2016-2018 cycle of the FE LTIP and, in the case of Mr. Schneider, the 2018 AIP.

In 2018, our NEOs (other than Mr. Schneider and Mr. Belcher) were paid at 127.6% of target opportunity under the FE STIP and at 193% of target opportunity for the 2016-2018 cycle of the FE LTIP. Mr. Belcher was paid at 128.1% of target opportunity under the FE STIP and at 200% of target opportunity for the 2016-2018 cycle of the FE LTIP because his performance cycle included FENOC KPIs for 2017. Mr. Schneider was paid at 173.5% of target opportunity under the 2018 AIP and at 200% of target opportunity for the 2016-2018 cycle of the FE LTIP because his performance cycle included FES KPIs for 2017 and 2018.

The table below summarizes realized compensation in 2018 for our NEOs:

 

           
Executive  

2018

Earned

Salary

 

2018 Annual

Incentive

(Paid in

2019) (1)

 

Performance-

Adjusted RSUs

(Earned in three-

year period

ending in 2018,

Paid in 2019)

 

Other

Compensation

 

Total 2018
Realized
Compensation

           

Charles E. Jones

  $1,136,113   $1,662,674   $18,121,058   n/a   $20,919,845

Steven E. Strah

  $594,835   $574,240   $2,910,923   n/a   $4,079,998

James F. Pearson

  $662,214   $758,454   $5,633,355   n/a   $7,054,023

Leila L. Vespoli

  $761,286   $823,483   $5,160,670   n/a   $6,745,439

Samuel L. Belcher

  $548,060   $506,951   $1,320,882   $434,700 (2)   $2,810,593

Bennett L. Gaines

  $442,051   $365,657   $1,468,984   n/a   $2,276,692

Donald R. Schneider

  $536,470   $1,794,568   $2,734,031   n/a   $5,065,069

 

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(1)

The Annual Incentive is the 2018 FE STIP for all NEOs, other than Mr. Schneider. For Mr. Schneider, the 2018 Annual Incentive reflects the cash payment of his 2018 AIP.

(2)

Other compensation for Mr. Belcher reflects the cash payment of his KERP award paid in December 2018 as discussed on page 52.

2019 Incentive Plan Design and NEO Compensation

Following substantial changes to our short-term and long-term incentive compensation programs in 2018, and a strong Say-on-Pay vote in 2018, your Company maintained the same general structure and design for both of our incentive compensation programs for 2019.

 

Executive   2019 Base Salary   2019 STIP (as a %
of Base Salary)
  2019 LTIP (as a %
of Base Salary)
  2019 AIP (as a %
of Base Salary)
         

Charles E. Jones

  $1,133,000   115%   545%   N/A

Steven E. Strah

  $650,000   80%   235%   N/A

James F. Pearson

  $660,400   90%   320%   N/A

Leila L. Vespoli

  $759,200   85%   255%   N/A

Samuel L. Belcher

  $610,000   75%   215%   N/A

Bennett L. Gaines

  $465,000   65%   125%   N/A

Donald R. Schneider (1)

  $535,000   N/A   N/A   255%

 

(1)

The incentive target opportunity percentage for the 2019 AIP was set to equal to 100% of what would otherwise be granted under the FE STIP and FE LTIP target opportunities.

In 2017 and 2018, the Committee decided, with input from management, that there would be no increases in salary or target bonus and long-term incentive opportunities as a percent of salary for all executive officers designated as Section 16 Insiders (excluding promotions).

In February 2019, the Committee decided, with input from management, to approve increases in compensation for certain NEOs and other Section 16 Insiders. The Committee determined that these increases were appropriate based on your Company’s continued progress toward becoming a fully regulated utility, the successful achievement of several strategic initiatives in 2018, and changes in market data provided by our independent consultant. The Committee, at Mr. Jones’ request, also recommended to the Board, and the Board approved, that there be no changes to Mr. Jones’ salary and target incentive compensation levels. The Board agreed with this determination, despite Mr. Jones’ exceptional performance and leadership during a pivotal period of transition given Mr. Jones’ pay positioning and past Say-on-Pay feedback.

The Board is supportive of pay increases for Messrs. Strah and Belcher, given that they continue to perform well in their respective new positions, and such increases will move them toward the Blended Median. The Committee, with input from management, chose not to make any changes to compensation for Mr. Pearson and Ms. Vespoli due to their upcoming retirements. The FES Board chose not to make any changes to compensation for Mr. Schneider due to his upcoming retirement. Effective March 2, 2019, Mr. Schneider stepped down as FES President and remains the executive chairman of the board of directors of FES.

Other Compensation Policies and Practices

 

 

Retirement Benefits

We offer retirement benefits to all of our NEOs through our qualified and nonqualified supplemental plans under the FirstEnergy Corp. Pension Plan and the Executive Deferred Compensation Plan (“EDCP”), respectively. The qualified plan benefit historically has been based on earnings, length of service, and age at retirement and is considered a defined benefit plan under the IRC. The qualified plan is subject to applicable federal and plan limits. The nonqualified supplemental plan is designed to provide a benefit to executives that is competitive and comparable to that for our general employee population; this plan also allows for RSU deferrals.

Additionally, Mr. Jones and Ms. Vespoli participate in the Supplemental Executive Retirement Plan (“SERP”). Messrs. Strah, Pearson, Belcher, Gaines and Schneider are not participants in the SERP. In

 

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January 2014, the SERP was formally closed to new entrants to better align our executive retirement benefits with current market practices. Historically, participation in the SERP was provided to certain key executives as part of the integrated compensation program intended to attract, focus, motivate, and retain top executives who are in positions to make significant contributions to our business. Retirement benefits for the NEOs are further discussed in the narrative section following the Pension Benefits table later in this proxy statement.

In July 2018, the Compensation Committee recommended, and the Board approved the Executive Voluntary Enhanced Retirement Program (“E-VERP”) for executive officers other than the CEO, including certain NEOs. Of those executives eligible, Ms. Vespoli and Mr. Pearson notified your Company that they were electing to participate in the E-VERP. The effective date of Ms. Vespoli’s and Mr. Pearson’s retirement will be April 1, 2019.

Active executive officers, other than the CEO, who are age 58 or older with at least 10 years of service as of December 31, 2018, were eligible to participate. The E-VERP includes the following benefits:

 

   

a lump-sum payment equivalent to what the employee would have received under the FirstEnergy Severance Benefits Plan;

 

   

a continuation of health care benefits for the equivalent severance period;

 

   

a temporary pension enhancement of $1,500 monthly up to age 65, with a minimum of 24 monthly payments; and

 

   

payment of unused Paid Time Off (PTO).

In November 2018, the board of directors of FES approved the FES VERO for certain FES employees designated as “insiders” in applicable bankruptcy filings, which was accepted by Mr. Schneider. The terms of the FES VERO are substantially similar to that of the E-VERP that was implemented in July 2018. Retirements under the FES VERO began on January 2, 2019 and continue until the earlier of December 31, 2019 or the effective date of a court-approved plan of reorganization for FES. Mr. Schneider’s retirement date will be May 1, 2019.

EDCP

Executives, including the NEOs, may elect to defer a portion of their compensation into the EDCP. Executives may defer from 1% to 50% of base salary to a cash retirement account; from 1% to 100% of FE LTIP awards to a stock account; and from 1% to 100% of FE STIP awards to either a cash or stock account. The EDCP offers executives the opportunity to accumulate assets denominated both in cash and in Company common stock, on a tax-favored basis. Beginning in 2017, any deferral elections to a cash or stock account made by a participant will ultimately be paid only in cash based upon his/her distribution elections.

Earnings on deferrals in the stock accounts of executives track FirstEnergy shares. Earnings on deferrals into the cash retirement accounts of executives were credited at the Moody’s Corporate Long-term Bond Yield Index rate plus 3% for funds deferred prior to 2013 and the Moody’s Corporate Long-term Bond Yield Index rate plus 1% for funds deferred in 2013 and later. Any above-market interest earnings are included in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column of the SCT.

Personal Benefits and Perquisites

The Company does not provide excessive perquisites to our NEOs.

In 2018, our NEOs could use the corporate aircraft for limited personal use. At Mr. Jones’ request and with Board concurrence, Mr. Jones is authorized to use either a commercial carrier or our corporate aircraft for any business or personal travel at his discretion. With CEO approval, other executives, including the NEOs, may from time to time use our corporate aircraft for personal travel, which may include family travel. We have a written policy that sets forth guidelines regarding the personal use of the corporate aircraft by executive officers and other employees in accordance with the IRS regulations and customary compensation practices.

The Compensation Committee believes the foregoing perquisite is reasonable, competitive, and consistent with our overall compensation philosophy.

 

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Severance Benefits upon an Involuntary Separation

In the event of an involuntary separation, the CEO’s severance benefits, if any, would be determined by the Compensation Committee, in its discretion, and approved by the Board. The NEOs, other than the CEO, are covered in the event of an involuntary separation under the FirstEnergy Corp. Amended and Restated Executive Severance Benefits Plan (the “Severance Plan”).

The Severance Plan provides severance benefits to executives who are involuntarily separated due to the sale or closing of a facility, merger, acquisition, corporate restructuring, reduction in the workforce or job elimination. Benefits under the Severance Plan are also offered if an executive rejects a job assignment that would result in the occurrence of any one or more of the following events: (1) a 15% or greater reduction in the executives’ then current base salary; (2) a requirement that the executive make a 50 mile or greater relocation from his or her current residence for reasons related to the new job; or (3) a requirement that the executive to make a 50 mile or greater change in his or her daily commute from their residence to a new reporting location.

The Severance Plan provides for three weeks’ of base pay for each full year of service with a minimum benefit of 52 weeks of base salary and a maximum benefit of 104 weeks of base salary. Additionally, executives who elect continuation of health care for the severance period will be provided this benefit at active employee rates. Executives must pay taxes on any continuation of health care value in excess of what employees with the same level of service would receive under the FirstEnergy Employee Severance Benefits Plan.

CIC Plan

The Compensation Committee believes that the CIC Plan is aligned with the market practices of our peer groups and it is available to all NEOs. Of the NEOs, the CIC Executives (as defined below) participated in the CIC Plan in 2018. The initial term of the CIC Plan commenced on January 1, 2017. The CIC Plan is subject to annual review by the Compensation Committee and Board, at which time the Board will determine whether to renew the term of the plan for an additional year or to affirmatively vote not to extend the term. In September 2018, the Compensation Committee recommended, and the Board approved, extending the term of the CIC Plan to December 31, 2020. All CIC Executives, as well as all non-NEO participants, are eligible for the same level of benefits, which include:

 

   

A 2X base salary plus target bonus multiplier for cash severance;

 

   

The annual STIP paid at target, prorated for the number of days worked in the year;

 

   

Beginning with the 2017-2019 LTIP cycle, if the LTIP is not replaced by the buyer, LTIP awards will be paid at target, prorated for the number of full months worked in the cycle;

 

   

Outplacement services for one year following the CIC, capped at a value of $30,000; and

 

   

Non-competition and non-disparagement obligations that protect the Company.

There are no excise tax gross-up provisions. Payments are “cut back” in the event that an excise tax would otherwise apply to the safe harbor amount minus one dollar ($1.00) unless the participant would receive greater after-tax proceeds absent such cutback. In such a case, the CIC Executive will receive payment of all CIC benefits and will be responsible for paying any excise tax imposed on the payment.

Share Ownership Guidelines and Prohibitions on Hedging and Pledging Shares

We believe it is critical that the interests of executives, directors and shareholders are clearly aligned. Therefore, the Compensation Committee has continued to refine share ownership guidelines to promote meaningful stock ownership by our executives, including our NEOs and directors. The Company not only wants executives to meet their required share ownership levels in a timely manner, but also to build an ownership mentality and demonstrate commitment to aligning their interests with shareholders.

These guidelines specify the value of Company shares that our executives must accumulate within five years of becoming an executive officer. Additionally, effective beginning January 1, 2018, executives who are not on track to meet their required share ownership levels or have failed to achieve required share ownership levels within the five-year compliance period may be subject to the following consequences imposed at the discretion of the Compensation Committee, subject to approval by the Board:

 

   

Reduce or eliminate the annual STIP award opportunity (as necessary) and consider replacement with a discretionary stock award; and/or

 

   

Require executives to purchase sufficient shares to meet their required share ownership levels.

 

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Each executive is required to retain all Company shares earned under equity grants or purchased or accumulated until the executive meets his or her share ownership guidelines. Additionally, executives are prohibited from selling shares held in excess of the share ownership guidelines without permission from the CEO. The specific share ownership guidelines are based on a multiple of an executive officer’s base salary, with the higher multiples applicable to the executives having the highest levels of responsibility.

The share ownership multiples for the NEOs in 2018 were as follows:

 

NEO    Share Ownership Multiples 
   

Mr. Jones

                 7X base salary

Mr. Strah

                 4X base salary

Mr. Pearson

                 4X base salary

Ms. Vespoli

                 4X base salary

Mr. Belcher

                 3X base salary

Mr. Gaines

                 3X base salary

Mr. Schneider

                           N/A(1)

 

  (1)

Since Mr. Schneider is no longer an executive officer of the Company, he is not subject to the stock ownership guidelines in 2018.

 

To be consistent with an entirely performance-based LTIP design, the Compensation Committee approved excluding unvested performance-adjusted RSUs as eligible shares for executives to meet their share ownership requirements.

The following types of holdings will count toward the share ownership guidelines:

 

   

Shares directly or jointly owned in certificate form or in a stock investment plan, including 60% of any unvested restricted stock;

 

   

Shares owned through the FirstEnergy Corp. Savings Plan;

 

   

Shares held individually or jointly by a broker, or, in certain circumstances, held in trust, or in an IRA, shares held by a spouse, or other beneficially owned shares, to the extent known by the Company; and

 

   

Units deferred pursuant to the EDCP.

As of December 31, 2018, Ms. Vespoli and Messrs. Jones, Pearson, and Gaines had met their share ownership requirements. As of March 1, 2019, Mr. Strah had met his share ownership requirement but had not met his share ownership requirements by December 31, 2018. Mr. Belcher has not yet met his share ownership requirements due to the increased requirements associated with his promotion in 2018. Mr. Belcher has until March 5, 2023 to meet his share ownership requirements and he is well-positioned to do so within the established timeframe. Although the Compensation Committee established share ownership guidelines for executives, such equity ownership typically does not impact the establishment of compensation levels. The Compensation Committee does review previously granted awards, both vested and unvested, that are still outstanding on a regular basis. In addition, the Insider Trading Policy prohibits our directors and Section 16 Insiders, including the NEOs from pledging shares and hedging their economic exposure arising from their ownership of our common stock.

Clawback Policy

Your Company has a clawback policy that covers all current or former employees who are deemed to be Section 16 Insiders. In the event that your Company is required to file a financial restatement due to material noncompliance, regardless of misconduct, the clawback policy allows for recoupment of all incentive-based compensation granted or earned after January 1, 2014 and during the three-year period preceding the filing of the accounting restatement. In addition, the policy grants authority to the Board and/or Compensation Committee to seek repayment from executives, reduce the amount otherwise payable under another Company benefit plan as allowed by law, withhold future incentive compensation, or a combination of these actions.

 

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Risk Assessment of Compensation Programs

At the request of the Compensation Committee, management assessed the risks associated with our compensation policies, practices, and programs for employees. In addition, management paid particular attention to those programs that allow for variable payouts where an employee may potentially be able to influence payout factors in those programs. The Compensation Committee reviewed management’s assessment and concurred with its conclusions. Based on this assessment, the Compensation Committee concluded that the risks associated with our compensation policies and practices are not reasonably likely to have a material adverse effect on your Company.

The Compensation Committee and management designed our compensation programs to align our executives’ interests with the long-term interests of our shareholders without encouraging excessive risk taking. In this regard, our compensation structure contains various features intended to mitigate excessive risk taking. These features include, among others:

 

   

The mix of compensation among base salary, and short- and long-term incentive programs is not overly weighted toward short-term incentives, and thus, does not encourage excessive risk taking;

 

   

Our annual incentive compensation is based on multiple, diversified performance metrics, including financial, safety/operational, and business unit measures that are consistent with our long-term goals;

 

   

Other than for Mr. Schneider and Mr. Belcher, our long-term incentive compensation in 2018 consisted entirely of performance-adjusted RSUs that vest over a three-year period, emphasizing the achievement of performance over a longer time horizon;

 

   

The Compensation Committee oversees our compensation policies and practices and is responsible for reviewing, approving and/or recommending for approval by the Board, where necessary, executive compensation, including annual incentive compensation plans applicable to senior management employees and other compensation plans, as appropriate; and

 

   

Certain of our executives are required to own a specified level of shares to comply with share ownership guidelines, encouraging a long-term focus on enhancing shareholder value.

Additionally, our Chief Risk Officer participated in the discussion with senior management regarding the establishment of goals and their weightings and measurements for our short- and long-term incentive compensation programs and the 2018 performance results. The Chief Risk Officer provided his view to the Compensation Committee that:

 

   

The measurement of 2018 performance results was conducted in accordance with prescribed methodologies and precluded any beneficiary from controlling the calculation;

 

   

Proposed goals would not create inappropriate incentives or inadvertently encourage willingness to embrace risk exposures other than those we encounter in the normal course of our business;

 

   

By avoiding individually based goals or goals applicable only to a small group of employees, the risk of encouraging inappropriate behavior is greatly mitigated; and

 

   

There are adequate controls in place so that the beneficiary of any incentive payout cannot unilaterally control the measurement methodology.

For additional information regarding your Company’s risk management process and your Board’s role in risk oversight, see the related discussion in the “Corporate Governance and Board of Directors Information” section of this proxy statement.

Impact of Tax Requirements on Compensation

The Compensation Committee is responsible for addressing pay issues associated with Section 162(m) of the IRC, which section generally limits the tax deduction to $1 million for certain compensation paid to certain of our executive officers (and, beginning in 2018, certain former executive officers). Historically, compensation that qualified as “performance-based compensation” could be excluded from this $1 million limit. This exception has now been repealed, effective for taxable years beginning after December 31, 2017, except for certain compensation arrangements in place as of November 2, 2017 for which transition relief is available. The Compensation Committee and your Board sought from time to time to qualify executive compensation as tax deductible under Section 162(m) as in effect prior to 2018, where we believed it was in

 

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our best interest and in the best interest of our shareholders. However, we have not permitted this tax provision to distort the effective development and execution of our compensation program in the past, nor will we in the future.

We continue to evaluate the impact of the recent revisions to Section 162(m) of the IRC for their potential impact on your Company. Regardless of that impact, however, we will continue to design and maintain executive compensation arrangements that we believe will attract, retain, focus, and reward the executive talent that we need to compete successfully, even if in certain cases such compensation is not deductible for federal income tax purposes. In addition, because of the continued development of the application and interpretation of Section 162(m) and the regulations issued thereunder, there can be no assurance that compensation intended to satisfy the requirements for deductibility under Section 162(m), as in effect prior to 2018, will in fact be deductible.

 

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KPI Results and RSU Index Scores

 

 

2016 – 2018 Cycle FE LTIP Details

 

    2016     2017 (except Mr. Belcher and
Mr. Schneider)
    2018 (except Mr. Schneider)     Totals   
      Threshold      Target     Stretch     Result     Threshold      Target     Stretch     Result     Threshold      Target     Stretch     Result          

Capital Effectiveness Index(1)

                                                                                                       

FE Consolidated

    11.16%       11.43%       11.69%       11.79%       14.55%       14.94%       15.47%       15.05%       3.64%       3.91%       4.29%       4.29%          

CES

    7.58%       7.81%       8.10%       8.27%       n/a          n/a          n/a          n/a          n/a          n/a          n/a          n/a             

Regulated Distribution

    14.63%       14.89%       15.17%       15.67%       16.85%       17.14%       17.60%       17.25%       n/a          n/a          n/a          n/a             

Regulated Transmission

    10.88%       11.26%       11.45%       11.33%       11.28%       11.51%       11.87%       11.54%       n/a          n/a          n/a          n/a             

Total Points

                            5.68                                  3.26                                  n/a             

RSU Index Score (A)

                            1.42                                  1.09                                  1.50          4.01     
FFO/Adjusted
Debt Index(1)
                                                                                          

FE Consolidated

    14.62%       15.12%       15.62%       15.91%       18.37%       19.09%       20.11%       19.21%       16.08%       16.83%       17.91%       18.83%          

CES

    20.44%       21.10%       21.80%       21.83%       n/a          n/a          n/a          n/a          n/a          n/a          n/a          n/a             

Regulated Distribution

    21.89%       22.47%       23.07%       24.94%       34.74%       35.71%       37.27%       38.02%       n/a          n/a          n/a          n/a             

Regulated Transmission

    15.63%       16.79%       17.98%       16.84%       20.00%       20.66%       21.70%       21.26%       n/a          n/a          n/a          n/a             

Total Points

                            5.52                                  3.85                                  n/a             

RSU Index Score (B)

                            1.38                                  1.28                                  1.50          4.16     

Safety Total Points(1)

    1.26          0.88          0.71          0.59          1.21          0.89          0.45          0.99          1.22          0.82          0.55          0.80             

RSU Index Score (C)

                            1.50                                  0.84                                  1.04          3.38     

Total RSU Index Score (A+B+C)

                            4.30                                  3.21                                  4.04          11.55     

 

(1)

Refer to the CD&A Glossary of Terms on page 67 for definitions.

For Mr. Belcher, the 2016 and 2018 KPIs under the FE LTIP and results are as shown on the tables above, with total points of 4.30 for 2016 and 4.04 for 2018. For the 2017 year of the outstanding 2016-2018 cycle under the FE LTIP, the KPIs are the same as those used in the 2017 FES R-LTIP with total points of 4.31 as shown in the table below.

 

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2016 – 2018 Cycle FES LTIP Details for Mr. Schneider (and 2017 results for Mr. Belcher)

 

    2016     2017     2018     Totals  
      Threshold      Target     Stretch     Result      Threshold      Target     Stretch     Result      Threshold      Target     Stretch      Result          

Capital Effectiveness Index(1)

                                                                                                       

FE Consolidated

    11.16%       11.43%       11.69%       11.79%       n/a       n/a       n/a       n/a       n/a       n/a       n/a       n/a          

CES

    7.58%       7.81%       8.10%       8.27%       n/a       n/a       n/a       n/a       n/a       n/a       n/a       n/a          

Regulated Distribution

    14.63%       14.89%       15.17%       15.67%       n/a       n/a       n/a       n/a       n/a       n/a       n/a       n/a          

Regulated Transmission

    10.88%       11.26%       11.45%       11.33%       n/a       n/a       n/a       n/a       n/a       n/a       n/a       n/a          

Total Points

                            5.68