Categories Earnings Call Transcripts, Other Industries

FirstEnergy Corp (FE) Q1 2021 Earnings Call Transcript

FE Earnings Call - Final Transcript

FirstEnergy Corp (NYSE:FE) Q1 2021 earnings call dated Apr. 23, 2021.

Corporate Participants:

Irene M. Prezelj — Vice President, Investor Relations, Acting Vice President, Communications, Corporate Affairs & Commu

Steven E. Strah — President and Chief Executive Officer

John W. Somerhalder II — Vice Chairperson and Executive Director

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs, Acting Vice President, External Affairs

Analysts:

Michael Lapides — Goldman Sachs — Analyst

Steve Fleishman — Wolfe Research — Analyst

Julien Dumoulin-Smith — Bank of America — Analyst

Jeremy Tonet — JPMorgan — Analyst

Stephen Byrd — Morgan Stanley — Analyst

Angie Storozynski — Seaport Global Securities — Analyst

Durgesh Chopra — Evercore ISI — Analyst

Paul Patterson — Glenrock Associates — Analyst

Charles Fishman — Morningstar — Analyst

Presentation:

Operator

Greetings and welcome to the FirstEnergy Corp First Quarter 2021 Earnings Conference Call. [Operator Instructions]

It’s now my pleasure to introduce your host, Irene Prezelj, Vice President, Investor Relations for FirstEnergy Corp. Thank you. Ms. Prezelj, you may begin.

Irene M. Prezelj — Vice President, Investor Relations, Acting Vice President, Communications, Corporate Affairs & Commu

Thank you. Good morning everyone and welcome to our first quarter earnings call.

Today we will make various forward-looking statements regarding revenues, earnings, performance, strategies, prospects and other matters. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by these statements can be found on the Investors section of our website under the Earnings Information link and in our SEC filings.

We will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures, the presentation that supports today’s discussion and other detailed information about the quarter can be found in the Strategic and Financial Highlights document on the Investors section of our website.

Participants in today’s call include our President and Chief Executive Officer, Steve Strah; Senior Vice President and Chief Financial Officer, Jon Taylor; and our Vice Chairperson and Executive Director, John Somerhalder. We will also have several other executives available to join us for the Q&A session.

Now I’ll turn the call over to Steve.

Steven E. Strah — President and Chief Executive Officer

Thank you, Irene, and good morning everyone. Yesterday, we reported first quarter 2021 GAAP earnings of $0.62 per share and operating earnings of $0.69 per share, which is in the upper end of our guidance range. As Jon will discuss, our results reflect the continued successful implementation of our investment strategies, higher weather-adjusted load in our residential class and strong financial discipline in managing our operating expenses.

Last month, I was honored to be named FirstEnergy’s CEO and appointed to the Board of Directors. I greatly appreciate the trust and confidence the Board has placed in me, since I was named President last May and Acting CEO in October. I have great pride in FirstEnergy and the work our employees do to serve our customers and communities. It’s my privilege to continue leading the company as we navigate our current challenges and position our business for long-term stability and success. As we work to move FirstEnergy forward, my priorities are the continued safety of our employees and customers. Ensuring that ethics, accountability and integrity are deeply ingrained in our culture and supported by a strong corporate compliance program. Executing FE forward, our transformational effort to capitalize on our potential, deliver long-term results and maximize near-term financial flexibility and continuing our investments in infrastructure growth opportunities from electrification, grid modernization and renewable integration to benefit our customers.

During today’s call, I’ll provide an update on the Department of Justice investigation, regulatory matters and our FE Forward initiative and other business developments. John Somerhalder will join us for an update on the Board and management’s work towards instilling a culture of compliance built upon the highest standards of ethics and integrity. Then Jon Taylor will review our results and other financial topics, before we open it up for your questions.

As we discussed on our fourth quarter call, we are committed to taking decisive actions to rebuild our reputation and focus on the future and continuing to cooperate with the ongoing government investigations. We have begun discussions with the DOJ regarding the resolution of this matter, including the possibility FirstEnergy entering into a deferred prosecution agreement. We can’t currently predict the timing, outcome or the impact of the possible resolution with the DOJ.

Our goal is to take a holistic and transparent approach with a range of stakeholders across the spectrum of matters under review. This approach is consistent with the changes we’re making in our political and legislative engagement and advocacy. For example, we are stopping all contributions to 501(c)(4)s. We’ve paused all other political disbursements, including from our political action committee. And we have limited our participation in the political process. We have also suspended and/or terminated various political consulting relationships. In addition, we’ll be expanding our disclosures around political spending in order to provide increased transparency. For example, we have committed to post updates on our website, on our corporate political activity, relationship with trade associations and our corporate political activity policy, which is under revision.

A comprehensive and open approach is also the cornerstone in our regulatory activity. In Ohio, we continue taking proactive steps to reduce the regulatory uncertainty, affecting our utilities in the state. This includes our decision in late March to credit our Ohio utility customers approximately $27 million. This comprises the revenues that were collected through the decoupling mechanism authorized under Ohio law plus interest, the partial settlement with the Ohio Attorney General to stop collections of decoupling revenues and our decision not to seek recovery of lost distribution revenues from our Ohio customers. Together, these actions fully address the requirements approved in Ohio House Bill 128 as well as the related rate impact of House Bill 6 on our customers. These are important steps to put this matter behind us.

In other Ohio regulatory matters, we proactively updated our testimony in the ESP quadrennial review case to provide perspective SEET values on an individual company basis. We are engaged in settlement discussions with interested parties on this matter as well as the 2017, 2018 and 2019 SEET cases that were consolidated into this proceeding.

During our last call, we mentioned that we were proactively engaging with our regulators to refund customers for certain vendor payments. Those conversations are underway in each effective jurisdiction. In Ohio at the PUCO’s request, the scope of our annual audit of Rider DCR has been expanded to include a review of these payments. Outside of Ohio, our state regulatory activity is concentrated on customer-focused initiatives that will support the transition to a cleaner climate. For example, on March 1, JCP&L, filed a petition with the New Jersey Board of Public Utilities seeking approval for its proposed EV driven program. If approved, the four-year $50 million program would offer incentives and rate structures to support the development of EV charging infrastructure throughout our New Jersey service territory, in an effort to accelerate the adoption of electric vehicles and provide benefits to our residential, commercial and industrial customers.

And in late March the Pennsylvania PUC approved our five-year $390 million energy efficiency and conservation plan, which supports the PUC’s consumption reduction targets. In other recent developments, last week, FERC approved our uncontested JCP&L forward-looking formula rate settlement without any modifications. In March, we closed the transaction to sell JCP&L’s 50% interest in the Yards Creek pump-storage hydro plant and received proceeds of $155 million. And we also announced plans to sell Penelec’s Waverly New York distribution assets, which serves about 3,800 customers to a local co-op. The deal, which is subject to regulatory approval will simplify Penelec’s business by solely focusing on Pennsylvania customers.

During our fourth quarter call, we introduced you to FE Forward, our company-wide effort to transform FirstEnergy into a more resilient, effective industry leader delivering superior customer value and shareholder returns. We expect the FE Forward initiatives to provide a more modern experience for our customers with efficiencies in operating and capital expenditures that can be strategically reinvested into our business, supporting our growth and investments in a smarter and cleaner electric grid, while also maintaining affordable electric bills.

During the first phase of the project, we evaluated our processes, business practices and cultural norms to understand where we can improve. While our safety and reliability performance is strong, we found opportunities in many areas to enhance and automate processes, take a more strategic focus on operating expenditures and modernize experiences for our customers and employees. We’ve identified more than 300 opportunities and now we are diving deeper into these ideas, developing detailed executable plans as we prepare for implementation beginning later this quarter. Examples of this work include, improving the planning and scheduling through integration of systems to allow our employees to deliver their best to our customers, leveraging advanced technologies such as drones and satellite imagery to improve our vegetation management programs, using predictive analytics and web-based tools to provide our customers with more self service options and improve their experience and leverage purchasing power to optimize payment terms.

As part of these efforts, we intend to evaluate the appropriate cadence to initiate rate cases on a state-by-state basis to best support our customer focused strategic priorities. We will also remain focused on emerging technologies, smart grid, electric vehicle infrastructure and our customers’ evolving energy needs as we think through how to reduce our carbon footprint.

We’re off to a great start this year, and yesterday we reaffirmed our 2021 operating earnings guidance of $2.40 to $2.60 per share. Our leadership team is committed to upholding our core values and behaviors and executing on our proven strategies as we put our customers at the center of everything we do. We will take the appropriate steps to deliver on our promise to make FirstEnergy a better company, one that is respected by our customers, the investment community, regulators and our employees.

Thank you for your time and confidence. Now I will turn the call over to John Somerhalder.

John W. Somerhalder II — Vice Chairperson and Executive Director

Thanks, Steve, and hello everyone. It’s a privilege and a pleasure to join you today. I’d like to start by sharing my impressions of FirstEnergy after almost two months in this role. This is a company with a firm foundation, including a commitment to improve in the area of governance and compliance, our commitment to customers by embracing innovation and technology to help ensure the strength, resilience and reliability of its transmission and distribution businesses, a deep seeded and strong safety culture and a strong potential to deliver significant value to investors through customer focused growth.

Since joining the team, I’ve been supporting senior leadership in advancing the company’s priorities, strengthening our governance and compliance functions and enhancing our relationships with external stakeholders, including regulators and the financial community.

Steve spoke about our business priorities. So, I will focus my remarks today on our compliance work including remedial actions. First, I’d like to update you on our internal investigation which has rebuild no new material issues since our last earnings call. The focus of the internal investigation has transitioned from a proactive investigation to continued cooperation with the ongoing government investigations. Management and the Board with the assistance of the compliance subcommittee of the Audit Committee, have been working together to build a best-in-class compliance program. Through these efforts, we have identified improvement opportunities in five broad categories, including governance, risk management, training and communications, concerns management and third-party management. As part of these efforts FirstEnergy is embracing a commitment to enhancing its compliance culture to be best-in-class.

Some of the actions completed to date include hiring, our Senior Vice President and Chief Legal Officer, Hyun Park in January; Antonio Fernandez, who joined as Vice President and Chief Ethics and Compliance Officer last week; and myself. On the Board side, Jesse Lynn and Andrew Teno, joined us from Icahn Capital in March. And the Board has nominated a new Independent Member, Melvin Williams for election at the Annual Shareholders Meeting when Sandy Pianalto’s term ends next month. I believe the insights and experience of these new leaders are helping to round out a very committed and confident Board and management team. In March, the Board affirmed our confidence in Steve by naming him CEO. Steve has consistently demonstrated the integrity, leadership skills, strategic acumen and deep knowledge of our businesses needed to position FirstEnergy for long-term success and stability. These changes along with the Board’s reinforcement of the executive team’s commitment to setting the appropriate tone at the top or support a culture of compliance going forward.

For instance, we recently held an event where the Chairman and the Chair of the Compliance subcommittee addressed the company’s top 140 leaders, regarding the expectations to act with integrity, in everything we do. Our legal department recently completed training on up the ladder reporting and we have enhanced our on-boarding process for new employees and for third-parties on expectations around our code of business conduct. Over the course of the next few months, there will be many more steps the company will take to enhance our compliance program such as, continuing to build the new more centralized compliance organization under Antonio’s leadership; addressing our processes, policies and controls, which include additional oversight for political contributions; continuing to emphasize our values and expectations in ongoing communications with our employees, incorporating compliance into our goals and performance metrics and holding all employees regardless of title to the same standards; enhancing the channels for incident reporting and developing thorough and objective processes to investigate and address allegations of misconduct; and insuring increased communications with and training of employees with respect to our commitment to ethical standards and integrity of our business procedures; compliance requirements; our code of business conduct; and other company policies; and understanding and utilizing the process for reporting suspected violations of law or code of business conduct.

We have also enhanced our internal controls around disbursements to require additional approvals, targeted reviews of any suspicious payments and a reassessment of approval levels across the entire company. Additionally, in the area of disbursements, we will update and clarify policies and procedures, conduct training and institute a regular audit program that reviews payments and services performed. A detailed list of the corrective actions we are taking can be found on Pages 8 and 9 of our first quarter FactBook. Over the next several months, we expect to make significant progress in the areas of compliance led by Antonio’s organization, where it will continue to be overseen by the Board and the newly established management steering committee for Ethics and Compliance. Through these efforts, we expect the material weakness associated with the tone at the top to be remediated by the time we file our fourth quarter earnings.

Our leaders are continuing to elevate the importance of compliance and working to regain the trust of employees and our stakeholders by modeling appropriate behavior and consistently communicating that compliance and ethics are core values, just like safety. We are committed to ensuring that employees understand what is expected of them and are comfortable reporting ethical violations without fear precautions. By continually emphasizing the importance of compliance to our strategies and future as well as demonstrating that we are setting the right tone at the top, we strive to bolster confidence among our employees that the management team and the Board are taking the proper decisive actions to move the company forward. I believe we have learned a lot from recent challenges and are taking the right actions to emerge as a better, stronger company with a bright future.

Now I’ll turn the floor over to Jon Taylor for a review of first quarter results and the financial update.

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Thanks, John. Before I review the quarter, you have probably noticed a new look to the materials posted to our website. We have provided new disclosures in three main areas within our Investor FactBook. Our steps to support a cleaner, smarter grid and the movement to more green and renewable resources, additional disclosures on our balance sheet, including our funds from operations target and the steps we’re taking to achieve our goals and third, enhanced ESG disclosures. Also note that we continue to provide more robust disclosures on ROEs including more granular sensitivities.

Yesterday we announced GAAP earnings of $0.62 per share for the first quarter of 2021 and operating earnings of $0.69 per share, which was at the upper end of our guidance range. GAAP results for 2021 include two special items, regulatory charges related to customer refunds associated with previously collected Ohio decoupling revenues and expenses associated with the investigation.

In our distribution business our results for the first quarter of this year as compared to 2020 reflect higher residential usage on both in actual and weather-adjusted basis as well as growth from incremental riders and rate increases, including DCR and grid modernization in Ohio, the distribution system improvement charge in Pennsylvania and the implementation of our base rate case settlement in New Jersey. These drivers were partially offset by $0.10 per share related to the absence of Ohio decoupling revenues and our decision to forgo the collection of lost distribution revenues from our residential and commercial customers.

Our total distribution deliveries for the first quarter of 2021 decreased 2% on a weather-adjusted basis as compared to the last year, reflecting an increase in residential sales of 2% as customers continue to spend more time at home in the first quarter of 2021, a decline of 7% in commercial sales and in our industrial class first quarter low decreased 3%. It’s worth noting that total distribution deliveries through the first quarter are consistent with our internal load forecast, with residential demand 2% higher versus our forecast, while industrial load is down 2%.

In our regulated transmission business earnings decreased as a result of higher net financing costs, which included an adjustment to previously capitalized interest, partially offset by the impact of rate base growth at our ATSI and MAIT subsidiaries. Finally, in our corporate segment, results reflect lower operating expenses, offset by the absence of a first quarter 2020 pension OPEB credit, related to energy harbors emergence from bankruptcy as well as higher interest expense.

We are off to a solid start for the year and are reaffirming our operating earnings guidance of $2.40 to $2.60 per share for 2021. We’ve also introduced second quarter guidance of $0.48 to $0.58 per share. In addition, our strong focus on cash helped drive a $125 million increase in adjusted cash from operations and a $185 million increase in free cash flow versus our internal plan for the first quarter.

As to a couple of other financial updates, our 2021 debt financing plan remains on track. In March FirstEnergy transmission issued $500 million in senior notes and a strong well supported bond offering that showcase the strength of our transmission business. The deal was oversubscribed and on par with an investment grade offering. We used the proceeds to repay $500 million in short-term borrowings under the FET revolving credit facility. In addition, we repaid $250 million at the FirstEnergy Holding Company. We also successfully issued $200 million in first mortgage bonds at MonPower in April, that was also very well supported. This supports our earlier commitment to reduce short-term borrowings as well as our goal to improve our credit metrics at FirstEnergy, return to investment grade as quickly as possible and maintain the strong credit ratings at our utilities. We continue to provide the rating agencies with regular updates on our business and we are working with them to develop a clear outline of what is needed to return FirstEnergy to investment grade credit ratings.

Key milestones include governance and compliance changes at our company, resolution of the DOJ investigation and solid credit metrics. As to more longer term financing needs through the execution of FE Forward, we have reduced our debt financing plan by approximately $1 billion through 2023, mainly at the FirstEnergy and FirstEnergy Transmission holding companies. Additionally, as we have previously mentioned, equity is an important part of our overall financing plan, with plans to raise up to $1.2 billion of equity over 2022 and 2023. As we said previously, we’ll flex these plans as needed and we are also exploring various alternatives to raise equity capital in a manner that could be more value enhancing to all stakeholders. These actions combined with new rates at JCP&L and our 60% plus formula rate capital investment program will generate $150 million to $200 million of incremental cash flow each year, while maintaining relatively flat adjusted debt levels through 2023, all of which will support our targeted 12% to 13% FFO to debt range.

Turning to our pension. Our funding status was 81% at March 31, up from 78% at the end of last year, resulting in a $500 million reduction in our unfunded pension obligation, which improves our adjusted debt position with the rating agencies. The extended funding timeframe permitted under the American Rescue plan, together with the modification of interest rate stabilization rules means that we do not expect any funding requirements for the foreseeable future, assuming our plan achieves a 7.5% expected return on assets. Although, we plan to make contributions into the pension next year, this legislation provides us with additional discretion and flexibility to make voluntary contributions as we assess our capital allocation plans.

As Steve mentioned discussions have begun with the Department of Justice. While no contingency has been reflected in our consolidated financial statements, we believe that it is probable we will incur a loss in connection with the resolution of this investigation. However, we cannot yet reasonably estimate the amount.

Finally last month President Biden introduced the American Jobs Plan, which includes a corporate tax increase and proposed minimum tax as well as potential opportunities related to proposed infusion into the electric vehicle infrastructure and the energy grid. Clearly, it’s very early in the process, but the corporate tax provision could be slightly cash positive for us if implemented in its current form.

Our solid first quarter results and expectations for the year reflect our strong operating fundamentals and the continued success of our strategies to modernize and enhance our distribution and transmission systems. As we move our company forward, we are laser focused on unlocking opportunities and increasing value for our shareholders, customers and employees. Thank you for your time.

Now, let’s open the call to your Q&A.

Questions and Answers:

Operator

Thank you. Now, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.

Michael Lapides — Goldman Sachs — Analyst

Hey everybody. Thank you for taking my question. Real quickly this point is probably for Jon. Your prior guidance and disclosure before the Act passed in March of this year that impacts pension assume pretty sizable pension funding requirements in 2022 and beyond. If you’re no longer making those pension funding requirements, why wouldn’t the equity funding requirements go down in lockstep?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Well, Michael, I appreciate the question. At least from my perspective, the equity is an important part of achieving our targeted FFO to debt of 12% to 13%. So if it’s not used to pay down pension obligations, it would be used to pay down other balance sheet related debt. So we are laser focused on improving the balance sheet, getting it up to that 12% to 13% and equity is a key component of that.

Michael Lapides — Goldman Sachs — Analyst

In other words, what you’re basically saying is, you’re saving cash from not having to make pension requirements, but you’re looking to delever. Like you recognize, hey, we need to delever where more levered than our peer group, let’s delever, reduce the risk profile play for the higher ratings from the…

K. Jon Taylor — Senior Vice President and Chief Financial Officer

That’s right.

Michael Lapides — Goldman Sachs — Analyst

Okay.

K. Jon Taylor — Senior Vice President and Chief Financial Officer

That’s right. If you look at where we’re going to be this year, somewhere around 10% to 10.5% FFO to debt that’s not acceptable for us. We want to be at the 12% to 13% and then have a plan to improve going forward.

Michael Lapides — Goldman Sachs — Analyst

Got it. Makes a ton of sense. Okay, one follow-up. You all gave great detail on a lot of the distribution capex projects or potential projects meaning state-by-state, etc. What I’m struggling a little bit to understand is aligning that detail with what’s actually in your capex guidance on the distribution segment, meaning or — are things that you filed for say the — in Pennsylvania where the EV project and New Jersey that weren’t kind of small, what’s in guidance and which of these are not in guidance or are these all upside to guidance?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

So Michael, I would tell you that some of the filings that we’ve made that have not been approved are not in our capex forecast currently, so that would be upside to the capex programs. What we have, it’s in our forecast now, are those items that have been approved, other than I think in 2022 and ’23, we do assume that we’re going to roll into a grid mod two program. So I think that would be the only item out there that’s in our forecast that has not been approved.

Michael Lapides — Goldman Sachs — Analyst

Meaning…

Steven E. Strah — President and Chief Executive Officer

That’s — I’m sorry Michael, that’s in Ohio grid mod 2 in Ohio.

Michael Lapides — Goldman Sachs — Analyst

Right. Okay. Thank you guys. Much appreciated.

Steven E. Strah — President and Chief Executive Officer

Thanks, Michael.

Operator

Thank you. Our next question comes from the line of Steve Fleishman with Wolfe Research. Please proceed with your question.

Steve Fleishman — Wolfe Research — Analyst

Yes, hi, good morning. Thanks. So just a question on your comments on Ohio regulatory updates. So last call you talked about pursuing kind of a comprehensively resolve all regulatory issues in Ohio. And then it sounds like on this call, you are now officially engaged in settlement talks on the SEET issues both backward and looking forward, is that correct?

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs, Acting Vice President, External Affairs

Yes, good morning. It’s Eileen Mikkelsen. I’m Vice President of Rates and Regulatory Affairs. Thanks Steve for your question. We have engaged with a broad range of parties in Ohio in open, transparent kind of constructive discussions about a whole range of issues that are pending in Ohio. We had our first broad-based meeting on March 31 of this past quarter, very well attended represented by folks that represent really all of our customer groups. And in the course of that discussion, we are talking about the quadrennial review, the SEET cases both historical and prospective as well as many, many other matters. I would say that in the course of those discussions, I think the parties expressed to us generally an appreciation for the approach that we were taking in Ohio to resolving these matters and also generally an appreciation for the actions that the company has taken to date in Ohio to move past the issues that we currently face.

Steve Fleishman — Wolfe Research — Analyst

Okay. So to put it another way, you put out the Olive Branch to have these discussions and it does appear that the parties — the key parties, at least are willing to talk?

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs, Acting Vice President, External Affairs

Yes, that’s…

Steve Fleishman — Wolfe Research — Analyst

To you in settlement talks of these various issues.

Steven E. Strah — President and Chief Executive Officer

Yes, Steve, I want to be sensitive to the ongoing discussions, but at the end, we felt good as a team about the level of engagement. And as we had talked through on our prior call, part of this for us is a listening tour right, just listen to the various constituencies, work to understand where we can find common ground, and I think that process is often running, just as we had committed to.

Steve Fleishman — Wolfe Research — Analyst

Okay. And is this something that is, because I don’t think it’s been something that’s going to come up in any of the dockets for those, all those different cases. So is this something that’s going to continue on kind of outside the dockets of the cases?

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs, Acting Vice President, External Affairs

I think the conversations with the parties will continue ultimately if there is resolution of matters related to specific dockets that resolution would be posted to those dockets, but the conversations are outside of the formal proceedings at this point.

Steve Fleishman — Wolfe Research — Analyst

Great. Thanks. One other question, just for Jon, on the equity alternatives that you’re — that you talk about reviewing for that, is that the only thing I can really think of that would may be fit that would be asset sales and maybe you could just talk about if you are reviewing that, what would be your objectives, just like lower cost where less dilution or would there be other like strategic things that you might be looking at, if you are reviewing asset sales?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Yes, Steve. I mean, I guess the way I think about it, there are many different alternatives to raise equity capital that would be much more accretive in issuing common equity. For instance, something like the Duke Indiana transaction that was announced earlier this year. Obviously, it would have to be in line with our balance sheet priorities. Our focus on long-term customer focused growth, but, yes, we’re looking at a range of options to maximize value given our equity needs.

Steve Fleishman — Wolfe Research — Analyst

Okay, great, thank you very much.

Steven E. Strah — President and Chief Executive Officer

Thanks, Steve.

Operator

Thank you. Our next question comes from the line of Julien Dumoulin-Smith with Bank of America. Please proceed with your question.

Julien Dumoulin-Smith — Bank of America — Analyst

Hey, good morning everyone. Thanks for the time and the opportunity. Perhaps, if I can follow-up on the last couple of questions. First, can you elaborate a little bit more on what we could expect out of any resolution in Ohio? I know you provided some framers of about how you’re engaging with stakeholders, but what would you expect to the extent successful over here, I mean, could this be more than just resolution of the SEET test for instance. Any additional color would be appreciated? As well as whether the deferred prosecution agreement is a prerequisite. I suspect not, but I just want to ask that explicitly?

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs, Acting Vice President, External Affairs

It’s Eileen, and I’m going to address the regulatory discussions and then I’ll defer to others on the question with respect to the deferred prosecution agreement. But with respect to the settlement, we are, as Steve said, we are engaged in kind of a listening exercise. Our first meeting, we spent, really just listening to all the parties what areas were of interest to them and address a broad range of issues beyond necessarily the SEET and the quadrennial review cases. So we’re going to continue to let that process play out. It’s a little too early to call what the outcome will be, but we are committed to being as open and as transparent as we can be throughout the process listening and trying to react to what’s important to the other parties.

Steven E. Strah — President and Chief Executive Officer

Yes, Julien, on your second point, I’d like to just separate the potential for a deferred prosecution agreement from anything that we’re doing in Ohio. That’s the way I’m viewing it right now. And let me just spend a moment on the developments with the Department of Justice, because I suspect I’ll get a question later even. But the resolution discussions that we spoke of today are constructive and there are positive development for our company. As for the details of timing, the potential for fine or penalties, I really can’t speculate on that at all and I just do want to say though, I’m encouraged by our dialog and I’m encouraged that we are certainly going to continue to fully cooperate with the Department of Justice. And I just want to be very respectful of their process and not get ahead of it at all.

Julien Dumoulin-Smith — Bank of America — Analyst

Okay, understood. If you don’t mind. Can I clarify the last question, I think you were responding to Mike here, on the FFO to debt metrics and where you stand today versus prospectively. Could you talk about this FFO increase here of $150 million to $200 million annually in FFO off of 2020 through ’23 now? And then you talked about adjusted debt being relatively flat. Shouldn’t that sizably itself ready address the delta that you need to get back to where you want in your credit metrics? I just want to understand where the starting position when you’re thinking about any equity alternatives or incremental equity beyond what’s already in the plan at $600 million?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Julien, I would say that our adjusted debt levels remaining relatively flat assume up to $1.2 billion of equity. So that’s part of the plan to keep our adjusted debt relatively flat to where it was at the end of 2020. And then from an FFO perspective, I mean if you — if 60% of your capex program is on formula rates, you’re going to see some slight load benefits over the next two or three years as industrial and commercial come back. we have the JCP&L rate case that’s going to be implementing new rates at the end of this year, that’s going to be cash flow positive at the end of this year into next year. So that’s really going to be driving that incremental FFO up to $150 million to $200 million a year for the next few years. And so if we keep our adjusted debt levels then naturally you will grow into that 12% to 13%.

Julien Dumoulin-Smith — Bank of America — Analyst

Right. Said differently, status quo, you’re already on track to get back to where your metric need to be and we should be thinking about any incremental equity as addressing any incremental need that might now come out of the organic business but rather specific to funding requirements with EPA or otherwise or counteract?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Correct.

Julien Dumoulin-Smith — Bank of America — Analyst

Excellent. Thank you for clarifying that guys. Have a great day.

Steven E. Strah — President and Chief Executive Officer

Thanks, Julien.

Operator

Thank you. Our next question comes from the line of Jeremy Tonet with JPMorgan. Please proceed with your question.

Jeremy Tonet — JPMorgan — Analyst

Hi, good morning.

Steven E. Strah — President and Chief Executive Officer

Good morning.

Jeremy Tonet — JPMorgan — Analyst

Just want to shift gears a bit here if I could and with the buying infrastructure plan granted it’s very early innings and things can still kind of change shape over time, but just wondering at this stage what do you see the opportunities for FE at this point if the plan were to come to fruition as kind of broadly proposed right now?

Steven E. Strah — President and Chief Executive Officer

Well, I think there is potential for our company very clearly. We have being a fully regulated transmission distribution company in a five-state area with the diversity of assets that we have that may well be impacted, of course, in the transition in whatever form it takes to cleaner energy will certainly benefit our company. And I think we’re well positioned for that. I believe there is other factors that will come into consideration as the administration goes through the necessary next steps.

We have to have a very thoughtful transition embedded in this plan. There are economic impacts, potential reliability impacts for the T&D systems that we want to stay mindful of and look, the issue is not going to go away climate in some of the planning and United States is progressing forward and we all have to do our part. As you look at the overall goals and you look at our ESG greenhouse gas reduction goals, we have already placed out there a goal of a 30% reduction in carbon from 2019 levels by the year 2030 and we are on our way to achieving that. And we have a carbon neutrality goal in 2050. So I think our goal, our business plan, our strategy is consistent with what the Biden administration proposed. But I think there is a lot of work to do to take it from a policy statement to on the ground improvements.

Jeremy Tonet — JPMorgan — Analyst

Got it. That makes sense. And then turning over to FERC. It seems like there is possibly some developments there on the RTO adder side and I was just wondering if you could provide any thoughts that you have there on that broadly speaking and what impacts that could have to FE if that does happen?

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs, Acting Vice President, External Affairs

Yes, happy to address that question, thank you. When we look at the impact if in fact with this supplemental nopper that FERC issued which really maybe puts to rest this issue of the 50 basis point incentive that transmission organizations have been given for participation in RTOs. If we quantify that, it’s probably between $0.04 and $0.05 for us on a total basis across all our transmission organizations. But I think it’s also important to recognize this is just a supplemental notice of proposed rule making has to go through a comment, reply comment period and then take FERC action. And I would also point out that at the same time FERC really initiated a technical conference with respect to transmission incentives related to performance rate making, shared savings mechanisms in order to incent transmission and that meeting scheduled to occur in September of 2021. So I think there are some puts and takes on what may happen with transmission ROEs and of course, as you might expect, we’re going to stay very actively engaged in all of those discussions.

Steven E. Strah — President and Chief Executive Officer

Yes, I think that’s excellent, Eileen. I would just add, obviously our transmission business is very important to our strategy. As Eileen outlined, the $0.04 to $0.05 is a concern obviously, we’ll monitor it, but it’s not enough to throw our company off track certainly. We also have the advantage as a company to as I stated earlier, we have a very large footprint of diverse transmission and distribution assets in which we can invest in multiple opportunities should this development become a little bit more impactful to us.

Jeremy Tonet — JPMorgan — Analyst

That’s really helpful. Last one if I could real quick here. With regards to equity alternatives as you kind of touch on there and looking at where recent asset sales are treated, is there any reason you would issue equity at these levels instead of an asset sale. And given how the plan is for $600 billion next year, should we expect kind of more news on that front sooner if it takes a period of time to execute a sale if you do choose to go that route?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Well, Jeremy, I think that’s one of the reasons we’re looking at a trade like that. I mean if you just take the Duke Indiana forward multiple, it’s like issuing common equity at $50 a share. And so you have to take a look at those types of options when you have an equity need like we do. So I mean, I think that’s one of the reasons we are looking at something similar to that type of transaction.

Jeremy Tonet — JPMorgan — Analyst

Got it. That makes sense. That’s really helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Stephen Byrd with Morgan Stanley. Please proceed with your question.

Stephen Byrd — Morgan Stanley — Analyst

Hey. Thanks for the really thorough update. Just a couple of additional questions for me. On governance, I understand you’re sort of under revision on your entire approach, you mentioned more limited involvement in the political process, I wondered if you could just add a little bit more color unless it sort of premature given you’re sort of under review now?

Steven E. Strah — President and Chief Executive Officer

Well, as you said, Stephen, it’s under review. We are integrating our thinking in terms of formalizing a revised political activity policy. So that’s currently under revision. In the interim, I thought it was very important for our company to take the necessary actions that we did in terms of ceasing, giving the 501(c)(4)s as an example. The activity that we talk about in terms of no disbursements of our political action committee. We are taking a deep breath, putting a revision together that makes sense that will help define that limited scope in the political arena. And the way I view it is, you will see increased openness and transparency in what we’re involved in, accountability around that and we are going to get involved in things in which I could sit down and talk to any of my employees about or any of our customers about, for example, because it would make sense for our company to engage in it for the betterment of all stakeholders and that’s just my current view right now. There’ll be more to come as we really stand up our new compliance program that John Somerhalder spoke out, but that’s just our current thinking right now.

Stephen Byrd — Morgan Stanley — Analyst

That’s really, really helpful color. And then just one other question from me. Just in terms of the internal investigation, the review that you’ve been going through. Would you characterize that as sort of broadly complete in terms of sort of fact finding determining just going back through and understand everything that happened or would you say there is sort of significant additional work needed to kind of complete that investigation?

John W. Somerhalder II — Vice Chairperson and Executive Director

I think the good news, this is John Somerhalder, is that since the last earnings call, the investigation has not revealed any new material issues. So we are now transitioning that from proactive investigation to an investigation that will continue to cooperate with ongoing government investigation. So that transition has occurred or is occurring.

Stephen Byrd — Morgan Stanley — Analyst

That’s very helpful. That’s all I had. Thank you very much.

Operator

Thank you. Our next question comes from the line of Angie Storozynski with Seaport Global Securities. Please proceed with your question.

Angie Storozynski — Seaport Global Securities — Analyst

Thank you. So Steve you mentioned, that there is a separation between the DOJ negotiations and what’s happened in Ohio. But then again, it seems like the agreement with the Ohio Attorney General it’s more of a standstill agreement at least to me as everybody awaits the outcome of the DOJ negotiation. It seems like you guys are waiting with issuing debt at least JCP&L and Toledo again in anticipation of the potential DOJ settlement. And I’m just wondering is it a fair assessment of what’s happening?

Steven E. Strah — President and Chief Executive Officer

Well, Angie, the way I would look at it is, we have certainly a lot of moving pieces here that we have to coordinate appropriately. And to the extent we’re going to deal with and fully cooperate with the DOJ in my view that’s one work stream that we’re working on. All the activity that we have in Ohio which I find encouraging, but we have a lot more work to do there, that’s a separate work stream. We have multiple others that we’re working through. The way I would look at it is to the extent that that may or may not influence our financing plan, we just integrate that into the way the pieces are moving for us. And once again, Jon Taylor outlined the success that we’ve had in the markets. And I think we are all — with all the moving pieces we have, we’re in a stable environment with regard to all of that. So I guess that’s perhaps my best way to approach your question.

Angie Storozynski — Seaport Global Securities — Analyst

Okay. And separately, thank you for the additional disclosures in the FactBook, it’s great, these are greatly appreciated. One of the things that you guys mentioned there is that you are considering distribution rate cases in all of your jurisdictions, which I think includes Ohio. So far you’ve mentioned SEET as the issue that is being discussed with different interveners in Ohio. How about signing a distribution rate case early in the state?

Eileen Mikkelsen — Vice President, Rates and Regulatory Affairs, Acting Vice President, External Affairs

Well, I think, I want to remind folks that January 1 of this year we actually implemented our JCP&L distribution base rate case settlement, Jon mentioned how that will be accretive from a cash perspective starting later this year. I think last week, FERC approved our JCP&L transmission forward-looking formula uncontested rate settlement. Beginning January 1 of this year, we moved our remaining transmission assets to a forward-looking formula rate subject to hearing and settlement procedures. We are scheduled to have a rate case file in Maryland for our Potomac Edison by the first quarter of 2023 and we’re on schedule to file for our three Ohio companies by the end of our ESP which is May of 2024. And so beyond that, we kind of are continually evaluating how our cost stack up against our revenues to make judgments about if and when it would be appropriate to seek base rate cases.

Angie Storozynski — Seaport Global Securities — Analyst

Okay, thank you.

Steven E. Strah — President and Chief Executive Officer

Thanks. Angie.

Operator

Thank you. Our next question comes from the line of Durgesh Chopra with Evercore ISI. Please proceed with your question.

Durgesh Chopra — Evercore ISI — Analyst

Hey, good morning, guys. Thanks for taking my question here. Just wanted to clarify something. John, in your commentary you mentioned removal of a material weakness driven by the actions you’re taking on the governance front. Is that sort of a audit driven requirement or is that something that sort of you’re working with in tandem with credit agencies?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Well, I would tell you that this is Jon Taylor. We have two Johns on the call. So I’ll take the first piece of it and then if there is some follow-up that John Somerhalder wants to add we can do that as well. But I do think the material weakness is important to be remediated as part of our steps around the culture and around the tone-at-the-top, around governance and compliance. So I do think we spoke a little bit with the rating agencies about the plans around the material weakness, but I do think that’s important to them, but also I think what’s important to them is just more broadly the enhancements that we want to make to the compliance program.

John W. Somerhalder II — Vice Chairperson and Executive Director

Yes, this is John Somerhalder, just to follow-up on that. The set of recommendations and if you look in the FactBook on Pages 8 and 9, those are things that we’re pursuing in combination with our sub-committee of the — compliance sub-committee of the Audit committee. Those are the type recommendations that address a number of issues related to having best-in-class compliance ethics and compliance program, that’s very important to us. We are putting high priority on that, but then that will allow our internal, Jason and the internal folks as well as our external auditor to then work through the issues related to the material weakness. That’s why we indicate that we have a plan both to implement those recommendations and deal with the material weakness that we anticipate will allow us to deal with or remediate the material weakness by the time we file our fourth quarter Q or the K and announce our fourth quarter earnings

Durgesh Chopra — Evercore ISI — Analyst

Understood. Thank you. Just a quick follow-up to that, is there sort of a — and I think you sort of touched on this in your prepared remarks, but is there sort of a roadmap or sort of boxes you need to check in terms of actions you need to take from a governance standpoint for the credit rating agency to get more constructive? Have they shared sort of any qualitative or quantitative information with you to that effect?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Yes, we’re working through that Durgesh right now with them. I mean, I think they’re going to want to see us institute some of these enhancements that we’ve laid out in the FactBook around governance and compliance as well as maybe some of the detailed controls that we’ve implemented around disbursements that we spoke of in our prepared remarks. They want to be sure that this type of issue will not happen again, that we have the control structure, the culture to ensure that this type of issue will not happen again or that we’ve built the controls and the culture that would prohibit that type of — those types of issues. So I think they will be focused on those types of issues.

Durgesh Chopra — Evercore ISI — Analyst

Understood. Appreciate the color, guys. Thanks for the time.

Operator

Thank you. Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.

Paul Patterson — Glenrock Associates — Analyst

Hey, good morning.

Steven E. Strah — President and Chief Executive Officer

Good morning.

Paul Patterson — Glenrock Associates — Analyst

Just on the — and I apologize for this, but the decoupling, it looks like it was a $0.10 impact on the quarter and [Technical Issue] reading that correctly and just sort of if you walk us again through what the impact for the years supposed to be sort of?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Yes. So Paul, just if you think about last year decoupling was implemented in the first quarter. So there was an adjustment in the first quarter to true up 2019 revenues to the decoupling level, so that was a piece of it. The other piece of it that was fairly significant was the fact that in 2020, the temperatures were very, very mild. And so the decoupling adjusted for the mild temperatures and the impact on load. And then a smaller piece was the lost distribution revenues that we — that we’re not pursuing collection on. So that — those are the components that made up the $0.10 that kind of like $0.04, $0.04, $0.02 kind of thing. I think going forward in the second quarter you’ll probably see a $0.03 headwind. And then in the third quarter it will be a $0.04 headwind. And then obviously when we get into the fourth quarter, that’s when we took the charge associated reversing all of that and so that will flip for us.

Paul Patterson — Glenrock Associates — Analyst

Okay. Okay, great. And then just back to the 501(c)(4) stuff, is that — I wasn’t clear whether or not the — how much of this was permanent or not. And part of the statement seems to be a pause on the pack stuff and then I just wasn’t clear is the 501(c)(4) policy that you guys are implementing, is that perceived to be a permanent impact more or less, and if so kind of, is there a benefit from in terms of just financially speaking in terms of not distributing that?

Steven E. Strah — President and Chief Executive Officer

Paul the way I would put it, I’m sorry.

Paul Patterson — Glenrock Associates — Analyst

No, no, you go ahead. I apologize. Go ahead.

Steven E. Strah — President and Chief Executive Officer

The way I would put it is that decision is currently under review with our company. 501(c)(4)s when you look at it, there is a societal benefit component to it in which you can help community-based organizations. The other component of it the way I look at it is the political end of that spectrum and that certainly in a area that we are not going to participate in period. So as we work this through, our going forward measure will be not to contribute to 501(c)(4)s.

Paul Patterson — Glenrock Associates — Analyst

Okay. And is there any — when we take all this stuff into account what have you, is there any significant financial impact? I’ve seen depending on different companies sort of significant a number sometimes, is there a potential economic benefit that we could see as a result of this that’s worth mentioning or is it still under review?

Steven E. Strah — President and Chief Executive Officer

No, Paul, I would not look at it in that way. The way I would look at it is, look, we’re going to continue to be a — an excellent corporate citizen in helping the communities and our customers in the areas in which we work and live with them. And that’s the way I’m viewing our giving levels going forward, a large part of it. So there won’t be a large financial impact or embedded savings I would say.

Paul Patterson — Glenrock Associates — Analyst

Awesome. Thanks for the clarification. Thank you.

Steven E. Strah — President and Chief Executive Officer

Okay. Thank you, Paul.

Operator

Thank you. Our final question this morning comes from the line of Charles Fishman with Morningstar. Please proceed with your question.

Charles Fishman — Morningstar — Analyst

Thank you, as I’m betting cleanup. Hey, just one question. Your forecast in investment [Technical Issues] lower the bottom of the range to 2022 and 2023, my question would be is that reduction project specific or is this — or you want to see a little more clarity on some of cases, is it balance sheet enhancement you’re slowing down the cases to the investment or I guess the fourth way maybe all of is it to do with the Biden plan of $100 million in transmission and what impact or what opportunities that could create for regulated transmission?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

Yes, Charles, this is Jon. So you’re right that we did adjust some of the capex programs in transmission. That was mainly associated with the FE Forward program that we’re rolling out. Some of that will impact transmission as we look to lower our overall cost structure and become more efficient as we transform the company. We will consider ramping up capex once we get clarity around the Department of Justice investigation and outcomes. So that’s why we kind of took it off the bottom end of the range in those future years to give us a little bit of flexibility if we wanted to ramp up capital, we could get more work done with less money.

Charles Fishman — Morningstar — Analyst

Got it, okay. I understand lowering the range of 2022 and 2023, so $100 million this year, is that project specifics on?

K. Jon Taylor — Senior Vice President and Chief Financial Officer

So it is, it’s not necessarily project specific, but it is associated with restructuring some vendor contracts that we’ve had. We looked at some of the projects from a health perspective and decided to pull back a little bit until we run it through our new process around asset health modeling.

Charles Fishman — Morningstar — Analyst

Okay, great. Excellent, real helpful. Thank you. That’s all I had.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Strah for any final comments.

Steven E. Strah — President and Chief Executive Officer

Thank you. I’d like to thank everyone for being with us today and your continued support. Our leadership team is committed to transforming FirstEnergy into an industry leader that can deliver exceptional value to our customers and shareholders. And I hope everyone stays healthy and safe and we’ll talk to you all soon again. Thanks.

Operator

[Operator Closing Remarks]

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