FirstEnergy Corp. (FE) Q4 2021 Earnings Call Transcript

FirstEnergy Corp.  (NYSE: FE) Q4 2021 earnings call dated Feb. 11, 2022

Corporate Participants:

Irene M. Prezelj — Vice President, Investor Relations and Communications, FirstEnergy Service Company

Steven E. Strah — President and Chief Executive Officer

K. Jon Taylor — Senior Vice President, Chief Financial Officer and Strategy, FirstEnergy Service Company

Analysts:

Michael Lapides — Goldman Sachs — Analyst

David Arcaro — Morgan Stanley — Analyst

Angie Storozynski — Seaport Global — Analyst

Ryan Karnish — JPMorgan — Analyst

Presentation:

Operator

Greetings, and welcome to the FirstEnergy Corp. Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions]

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

Irene M. Prezelj — Vice President, Investor Relations and Communications, FirstEnergy Service Company

Thank you. Welcome to our fourth quarter and full-year 2021 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 and year can be found in the strategic and financial highlights document on the Investors section of our website. We’ll begin today’s call with presentations from Steve Strah, our President and Chief Executive Officer; and Jon Taylor, our Senior Vice President and Chief Financial Officer. Several other executives will be available for the Q&A session.

Now I’ll turn the call over to Steve.

Steven E. Strah — President and Chief Executive Officer

Thanks, Irene. Good morning, everyone. I’m glad you could join us and we have a lot of ground to cover. Over the past year, our Board, leadership team, and employees have worked together to dramatically reshape FirstEnergy. We have embraced important foundational changes to strengthen our culture and the core of our Company. We’re optimizing our operations through our transformational FE Forward initiative. And we bolstered our financial position to enable long-term strategic investments to modernize the electric grid and to deliver a superior customer experience. I’m extremely proud of our progress. This important work together with our continued strong operational performance is energizing our Company. Our efforts in 2021 were the first steps on a journey to transform FirstEnergy into a more sustainable Company centered on our core values and built for the long-term.

While the Deferred Prosecution Agreement, the approved Ohio settlement, and the progress we announced yesterday in resolving outstanding litigation are all very important milestones. Most of our significant work over the past year involves the cultural changes at our Company. So I’d like to start by talking about that. We are building a culture where all of us at every level in the organization feel valued and understand the importance of doing what is right. This means doing what is in the best interest of our stakeholders, as well as the environment, working as one team across the Company and developing an inclusive and safe culture, where employees feel empowered and motivated to speak up and bring their very best every day. This culture change is the foundation, the hard, if you will, of a new FirstEnergy, and I’m deeply committed to making this change.

My vision is to be a Company that all stakeholders trust that is focused on delivering value to our customers and where employees bring an innovative and continuous improvement mindset to work every day. Fulfilling this vision starts with our people. Through all of the tribulations over the past two years, our employees have risen to every challenge and shown true character. They’ve delivered strong results, while demonstrating a passion for what they do and a passion for serving customers. They deeply care about the communities we serve and they have a strong sense of pride for this Company.

But we know that pride was eroded by what happened related to House Bill 6. I along with the Board and the entire management team, I’m dedicated to restoring their pride by building a Company that is grounded in an unwavering culture of compliance, ethics, integrity, and accountability at every level. People are our greatest asset, and through our employee-driven FE Forward program, we are implementing their ideas and solutions to create value for our Company, our customers, and other stakeholders.

By investing $150 million in innovation, digital tools, and technologies, we can work more safely and efficiently deliver an exceptional experience for customers and unlock opportunities for growth that are embedded in the broad energy transition. For example, our employees have determined that we can better serve our customers through a five-state operating model with centrally driven best practices and processes as opposed to separate operating company management teams, and last week we made that transition. Employees are implementing enhanced communications and self-service options to improve the experience for customers when they need our assistance. They’re using data and analytics to drive better decisions around our assets, sourcing, and inventory resulting in better reliability for customers. And they’re capturing productivity improvements through system integration, automation, and mobility tools that will significantly reduce day-to-day work we outsource currently.

This is important work and coupled with our investments in a more modern and sustainable grid, we expect it to completely transform our Company inside and out. We’re enabling this transformation in part through an innovation center and digital factory. These functions which will be staffed by over 140 professionals are focused on enhancing the use of technology across our Company. Together, with IT and cyber, and physical security, they’re now led by our new Chief Information Officer, Steve Fortune, who joined us this week. Steve was formerly Group CIO at BP, where he led a major digital transformation. We’re fortunate to be able to bring him on board. We’ve recognized this is a journey, and I’m sure we’ll face challenges along the way, but I’m confident in our team’s ability to execute and meet our commitments as they did through 2021.

Now let’s spend a few moments on recent developments. First, in November, we announced a $3.4 billion transformational equity financing with two premier global infrastructure funds, Blackstone Infrastructure Partners and Brookfield Super-Core Infrastructure Partners. Blackstone purchased $1 billion in FirstEnergy common stock at $39.08 per share in a transaction that closed in December. As part of that investment, Blackstone has appointed Sean Klimczak to serve as a Board observer, and we expect to nominate a Director candidate recommended by Blackstone in our 2022 Shareholder Meeting.

Brookfield is purchasing a 19.9% stake in FET, which owns our ATSI, MAIT, and TrAILCo transmission companies. With an investment of $2.4 billion, this transaction represents a historic valuation in our industry. We expect that transaction to close in the second quarter. These strategic financings address all our equity needs will strengthen our financial position and support the incremental investment opportunities in our plan focused on sustainable investments that support the energy transition. We’re pleased to be a partner with these experienced and capable infrastructure investors who fully support the execution and acceleration of our current business strategy and transformation. Notably, these transactions demonstrate confidence in our business plan, our talented team, and our vision for long-term growth. They are also a key catalyst to executing our strategy for long-term 6% to 8% customer focused growth.

Also in November, we were pleased to reach a unanimous settlement with a broad range of parties on multiple Ohio proceedings that were under consideration by the Public Utilities Commission. The $306 million settlement, which was approved by the PUCO in December, benefits our Ohio customers, provides clarity around a wide range of topics and demonstrates our commitment to working openly and collaboratively with our stakeholders. We also continue to make substantial progress in resolving outstanding litigation in order to provide certainty to stakeholders and focus our attention on the future. We announced yesterday that in conjunction with the Special Litigation Committee of the Board of Directors, the Company agreed to a settlement to resolve multiple shareholder derivative lawsuits in Ohio.

Because these shareholder derivative suits brought on behalf of the Company and for the Company’s benefit, the settlement includes a payment to FirstEnergy of $180 million less plaintiffs’ legal fees to be paid by insurance. The settlement also stipulates a series of corporate governance enhancements, which are outlined in the press release we issued yesterday, and complement the substantial actions we have taken as a Company to strengthen our governance and compliance program over the last year and a half. Upon court approval, this settlement fully resolves the derivative actions. The settlement contains provisions for enhanced oversight and disclosure of political activities, third-party audits and action plans, and a review of the current executive team to be conducted by a Special Board Committee, and further alignment of financial incentives of senior executives with compliance measures.

Additionally, six members of the Board, who have served for a minimum of five years will not stand for re-election at the Company’s 2022 Annual Shareholder Meeting. On behalf of the Company, we thank these Directors for their commitment and years of service to FirstEnergy. I’ll also note, we have been evaluating various options to reduce the size of the Board following the addition of seven new Directors in 2021, with an eighth from Blackstone to be appointed at this year’s Annual Meeting. The Board will continue to comprise an impressive mix of skills, focus areas, and perspectives as it guides our Company through the next phase of our growth.

Turning to other regulatory matters, there’s also been progress on the Ohio expanded DCR audit, the DMR audit, and the Corporate Separation audit. The audit reports have been filed in all of these cases and we’ll continue to work through the regulatory process on each. During our third quarter call in late October, we alluded to two forthcoming filings in West Virginia that support the transition to clean energy. In November, we filed with the West Virginia Public Service Commission a plan to build 50 megawatts of utility scale solar generation in the state at a total cost of approximately $100 million.

And in December, we filed a plan to comply with environmental rules and responsibly operate our two remaining fossil plants for the benefit of West Virginia customers beyond 2028. We intend to begin a broad stakeholder dialog regarding our planned operational end dates of 2035 and 2040 for Fort Martin and Harrison respectively, which further supports our climate goals. We will also begin preparing for future rate case activity, including base rate case filings in 2023 for Maryland, West Virginia, and likely New Jersey. And in 2024 for Ohio, as well as the Ohio company’s filing to address the end of their current ESP which expires in May of 2024.

Also in 2022, we will continue our focus on ethics and compliance. These priorities include continuing to build a more centralized and robust compliance organization for updating and refining our processes, policies, and controls. Creating multiple channels for incident reporting and developing thorough and objective processes to investigate and address incidents of misconduct. Seeking continuous improvement by monitoring, benchmarking and obtaining an independent assessment of the program and completing the training for all employees on our new Code of Conduct and rolling out additional training on our speak-up culture and compliance.

Finally, our ongoing commitment to creating a more diverse equitable and inclusive work environment is an essential part of our overall cultural transformation taking place at our Company. I’m determined to build on our progress in this area. This is a time of historic change at FirstEnergy, change for the better. As we look to the future, I believe our Company will emerge as a premier utility and a leader in our industry. And I believe we can deliver value to our investors that mirrors the value we provide to customers. In all my years at FirstEnergy, I’ve never been more excited about what’s to come.

Now I’ll turn the call over to Jon for a financial update.

K. Jon Taylor — Senior Vice President, Chief Financial Officer and Strategy, FirstEnergy Service Company

Thanks, Steve. Good morning, everyone. I’m also excited about our future and the significant progress we’ve made to place FirstEnergy in a solid financial position. As I discussed, we have a lot of moving parts this year as we absorb the Ohio settlement, certain accounting changes, and begin to deploy the proceeds from the equity financings that we announced last year. As we integrate these elements into our financial plan, 2022 will be a baseline for strong long-term growth.

As always, we provided materials on our website to supplement our discussion today. The factbook has been refreshed to include additional information about our Company’s strategy and our financial plan through 2025. While we don’t plan to publish the factbook quarterly in 2022, we will expand the quarterly strategic and financial highlights deck to also include updates on our strategic priorities.

Now let’s take a look at the financial results we reported yesterday, since we have so much to cover, I’ll keep this part of our discussion a little shorter than normal. Yesterday, we announced 2021 fourth quarter GAAP earnings of $0.77 per share and operating earnings of $0.51 per share, which is at the midpoint of our guidance despite incredibly mild fourth quarter weather. There were several special items for the quarter, including a $0.47 per share mark-to-market gain on our pension due mainly to a higher discount rate, as well as a $0.22 per share regulatory charge resulting from refunds to customers on our Ohio PUCO settlement and a recent order in Pennsylvania to refund additional tax benefits.

In our Distribution business, fourth quarter results increased as a result of new base rates in New Jersey and higher revenues from capital investment programs. Fourth quarter earnings also improved over last year from the absence of the charge we took in 2020 related to our strategic decision to forgo collection of lost Distribution revenues in Ohio. Also impacting the quarter was lower customer demand and higher operating expenses associated with strategic investments made to enhance reliability for customers. For the quarter, total Distribution deliveries increased about 1% on both an actual and weather-adjusted basis compared to the fourth quarter of 2020. Higher industrial and commercial usage was partially offset by a 2% reduction in the higher-margin residential customer class.

Compared to pre-pandemic levels, weather-adjusted demand continues to be strong with our residential customers reflecting a 4% increase for the year, and although, industrial and commercial customer demand continues to be lower than we saw in 2019, we have seen incremental improvements each quarter of 2021. And our fourth quarter results reflect industrial and commercial demand down just under 2% and 3% respectively compared to the fourth quarter of 2019. And our Regulated Transmission business, earnings were consistent with our updated forecast, benefiting from higher rate base related to our Energizing the Future investment program, but this was more than offset primarily by higher net financing costs and other charges.

And in our Corporate segment, our results for the fourth quarter reflect lower operating expenses and higher discrete income tax benefits as compared to the fourth quarter of 2020. For the full-year, we reported GAAP earnings of $2.35 a share and operating earnings of $2.60 a share, which is at the midpoint of the range we provided last fall, representing a 9% increase compared to 2020 operating earnings of $2.39 a share. Our strong financial performance also resulted in $2.8 billion in cash from operations last year, which was $200 million more than our original cash from operations guidance and above the midpoint of the revised guidance range we provided on our third quarter call in October. And also reflects over $300 million of non-recurring cash payments, such as the penalty under our Deferred Prosecution Agreement.

Last fall, we outlined our $17 billion sustainable investment plan through 2025, which includes a $3.3 billion investment plan this year, encompassing grid modernization, resiliency, energy efficiency, enabling the energy transition, and base reliability improvements. We expect these investments to not only drive our 6% to 8% growth rate, but help us emerge as a leader in the energy transition. We also plan to make further improvements to our balance sheet this year. On January 20, we’ve redeemed $850 million of holding company debt and plan to retire another $500 million in HoldCo debt expiring later this year. We have begun to recapitalize certain of our operating companies to fund their capital programs and improve their credit profiles.

For instance, we’ve recently issued redemption notices for $150 million and $25 million of operating company debt at CEI and Toledo Edison respectively. We also plan to recapitalize certain other companies later this year to fund growth and enhance credit metrics and capital structures as we plan to be much more active with rate proceedings in the future. For 2021, our CFO to adjusted debt as defined by Moody’s was 11.5%. This excludes the one-time non-recurring payments I mentioned earlier and nets our $1.5 billion cash position with debt. We are pleased with our progress and we remain well positioned to achieve 13% CFO to debt by 2024.

As we consider the full deployment of the proceeds from the equity transactions, we will remain flexible considering market conditions to optimize our balance sheet and to fund our capital programs, including further reducing balance sheet debt at our holding company, optimizing utility capital structures to fund capital programs or voluntary pension contributions. Our qualified pension status has improved to 83% funded given the current interest rate environment. As Steve discussed, FE Forward is transforming our organization and setting the stage for us to deliver a superior customer experience.

In 2021, we achieved $300 million in total cash flow improvements from the program compared to our original expectation of $240 million. This included $170 million in net capex efficiencies along with $130 million in working capital improvements. As we look through 2025, we anticipate cash flow improvements to fund $1.6 billion in sustainable investments in our Distribution business to support the energy transition, while keeping customer rates affordable. Steve touched on several of our FE Forward focus areas and I’d like to expand on one more. As we all know unprecedented supply chain issues have impacted virtually all industries throughout the pandemic, we have successfully served our customers and continued our infrastructure investment programs despite these challenges.

However, through FE Forward, we are investing in our supply chain function to drive more integrated and strategic sourcing, improved market intelligence resulting in better pricing decisions, and to optimize performance in terms and conditions with our suppliers. We have also integrated our warehouse and inventory management group into our procurement function to complement our demand management forecasting with long-term purchasing decisions. By leveraging technologies and investing in resources, we’re streamlining our processes, achieving cost savings and better cash flow, and working to mitigate risk, the entire industry is experiencing.

While FE Forward is focused on transformation and innovation, we are seeing efficiencies in our operating and maintenance activities, which will provide for flexibility with our operating costs. In fact, from our 2022 base O&M of $1.4 billion, we anticipate that FE Forward will naturally reduce O&M levels at least 1% annually starting in 2023. This will afford added flexibility to be strategic with O&M as we were in 2021 and will also mitigate the impact on customer rates as we think about future rate cases.

We’ve recognized that we have a lot of moving parts this year. However, by applying the same focus that has changed our Company for the better over the past 12 months, I’m confident we will continue to implement the plans we’ve outlined and further transform our Company into an industry leader. At the same time, we’ll deliver on our financial commitments, including achieving our 2022 operating earnings guidance of $2.30 to $2.50 a share with growth of 6% to 8% thereafter, delivering on our 2022 cash from operations target of $2.6 billion to $3 billion and growing operating cash flow consistent with earnings over the planning period.

Executing our $17 billion investment plan, which includes $3.3 billion of investments in 2022. Maintaining our anticipated annual dividend rate of $1.56 a share this year with the objective to grow the dividend within our payout ratio as earnings increase consistent with our plan. Successfully closing on the FET minority interest sale, and finally making progress toward improving our balance sheet and strengthening the credit profile of FirstEnergy as we work to reach 13% FFO to debt by 2024 with mid-teens thereafter. Before we open the line for questions, I want to thank you for your time and your interest in the Company. We are proud to be building a long-term sustainable Company and culture centered on our core values and the vision Steve shared with you today.

And we’d be happy to take your questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.

Michael Lapides — Goldman Sachs — Analyst

Hey, guys. Thank you for taking my question. Just curious how do you think about bracketing the potential for O&M cost cuts, meaning is the 1% a year kind of a guideline level or do you think you can actually achieve more than that? And can you give a little more detail on where in the business you think it is that you’re going to get those cost cuts? Is it supply chain or is it across a lot of different functions?

K. Jon Taylor — Senior Vice President, Chief Financial Officer and Strategy, FirstEnergy Service Company

Yeah, Michael, this is Jon. Thanks for the question. So if you think about where we are for 2022 with the $1.4 billion of operating costs, about 60% of that is labor, the other 40% is materials and contractors that we have on the property to supplement our labor force field-work. And so as we think about O&M reductions through the FE Forward program and productivity improvements, that’s going to optimize obviously how we backfill attrition, but more importantly, it’s going to eliminate external contractor fees [Phonetic]. And we anticipate improved productivity through all the different initiatives that we’re working through somewhere in the 20% to 25% range in field operations.

Another example that we’re working through is around our asset repair/replace decisions and using better data and analytics to drive better decisions. And we’re piloting a few programs now, we’ve done some benchmarking. And we think we can get 30% more efficient in those types of programs in terms of how we deploy resources. And then finally, we’re modernizing our customer group, making it more automated, making it more user-friendly, with customer self-service options and the like, which will significantly reduce the number of manual transactions at our call centers, take today by up to 40%. So it’s improved productivity, it’s mostly around driving contractors off the property, but also will help us maintain staffing levels with our attrition.

Michael Lapides — Goldman Sachs — Analyst

Got it. Hey, Jon, one other follow-up. Just curious, I noticed in the slide deck you’re talking about kind of a wave of rate cases next year. Any potential change in, in kind of the structural regulation you’re expecting, meaning any efforts to get things like more trackers or forward-looking rate-making in places like West Virginia?

K. Jon Taylor — Senior Vice President, Chief Financial Officer and Strategy, FirstEnergy Service Company

No, I think it’s just going to be a traditional base rate case. We had the Veg management program in West Virginia. New Jersey is an area that I think we need to address the level of deferred storm costs that we have on the balance sheet. Today we have over $300 million of storm costs that we need to collect. So there will be something that we need to address there through some type of mechanism. But I think for the most part, these are going to be traditional base rate cases. And we’ll try to continue with the riders that we have in place in each of those jurisdictions.

Michael Lapides — Goldman Sachs — Analyst

Got it. Thank you, Jon. Much appreciated, guys.

Operator

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

David Arcaro — Morgan Stanley — Analyst

Well, hi, thanks so much for taking my question. I was wondering if you could maybe touch on right now kind of how you prioritize the use of capital that you generate the $5.5 billion that the plant generates over the next five years, priorities for deploying that capital and when you might kind of stage and make those decisions?

K. Jon Taylor — Senior Vice President, Chief Financial Officer and Strategy, FirstEnergy Service Company

Sorry, can you repeat your question? I wasn’t sure, I totally understood that.

David Arcaro — Morgan Stanley — Analyst

Oh, sure. So over the course of the plan, there is about $5.5 billion of cash that you’re generating, and you’ve mentioned dividend growth, minority interest distributions. Just wondering if there are kind of priorities for how you plan to allocate that capital and make strategic decisions around it?

K. Jon Taylor — Senior Vice President, Chief Financial Officer and Strategy, FirstEnergy Service Company

Yeah, yeah, now I — I understand now. Yeah. So if you look at our — just our high-level financing plan, if you do the capital program with our cash from operations in our planned financings, there is going to be a pool of cash leftover about $5.5 billion. About — there is going to be a portion of that will obviously fund dividends and dividend growth as we look to the future, but there will be a portion of that available to us. As I mentioned in my prepared comments, that will remain flexible on either to fund additional capex, delever the balance sheet or make pension contributions.

David Arcaro — Morgan Stanley — Analyst

Got it. That’s helpful. And just curious on timing of how that might play out over the next several years when you may be kind of able to take some of those initiatives?

K. Jon Taylor — Senior Vice President, Chief Financial Officer and Strategy, FirstEnergy Service Company

Yeah. So my sense is we’re going to try to close on the FET transaction sometime in the second quarter, we’ll obviously take some time to assess market conditions and probably make some decisions on that back half of this year.

David Arcaro — Morgan Stanley — Analyst

Got it, thanks. And maybe separately just in West Virginia with the dialog, that’s going to be undertaking around the coal plants. Wondering if you could give any expectations on how you think that could play out if there is appetite to pull forward closures of Fort Martin or Harrison?

Steven E. Strah — President and Chief Executive Officer

David, This is Steve. I think right now it’s too early on to really give you a good sense of that. We did do the ELG filing, which I think was an important step relative to just living up to our environmental responsibilities to continue to run those plants responsibly as I said in my prepared remarks. As for the ongoing dialog that we’re going to promote for the energy transition in West Virginia, we’re really just going to take that one step at a time. And we’re going to follow our approach in all matters here. And that’s to be open and constructive, listen to various concerns along the way, I think concerns will lead to opportunities that we could define that we’ll be thoughtful of and really just take it one step at a time.

David Arcaro — Morgan Stanley — Analyst

Understood. Thanks so much for the color.

Steven E. Strah — President and Chief Executive Officer

Thank you.

Operator

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

Angie Storozynski — Seaport Global — Analyst

Thank you. So just a couple of things. So we’re still waiting for an SEC settlement. I think we’re all surprised that you guys are getting money from the last settlement. So is there a way for you to communicate if net of that cash coming in, there is — you would still expect to have some meaningful cash outflow related to the SEC settlement?

Steven E. Strah — President and Chief Executive Officer

Angie, thanks for your question. Our work with the SEC is continuing in terms of once again being open and collaborative with them. And I want to respect that process and really not get ahead of it at all. With regard to the very nature of a derivative suit, there was a cash payout from the insurance companies that amounted to the $180 million and less court-approved plaintiffs’ fees that, that will be cash returned to the corporation. We have several other items that are in litigation beyond the SEC work, and we’re going to once again tackle those one at a time and just take it on a step-by-step basis.

Angie Storozynski — Seaport Global — Analyst

Understood. And then secondly, can you comment on Icahn’s involvement with the Board now that it feels like the strategic transformation of the Company is almost done?

Steven E. Strah — President and Chief Executive Officer

Well, I think their involvement with our Board remains unchanged. They’ve continued to be very constructive, very productive members of our Board. And I don’t see any change in that, Angie, right now. And we have found them to be great colleagues of ours as we’ve moved ahead.

Angie Storozynski — Seaport Global — Analyst

Okay, that’s all I have. Thank you.

Steven E. Strah — President and Chief Executive Officer

Thanks, Angie.

Operator

[Operator Instructions] Our next question comes from the line of Jeremy Tonet with JPMorgan. Please proceed with your question.

Ryan Karnish — JPMorgan — Analyst

Hey, good morning. It’s actually Ryan on for Jeremy. I just wanted to ask one on the FERC audit that came out last week, and you guys kind of very clear on the different Vegetation Management changes that are kind of being contemplated next year. But just wondering is there anything in there that we kind of be thinking about that would kind of impact go-forward earnings, thinking about kind of the CFO [Phonetic] calculations or the capitalizations, any impacts from that?

Steven E. Strah — President and Chief Executive Officer

Well, Ryan, let me just provide a couple of comments here and then I’ll flip it over to Jon. As you’ll recall in 2019, FERC initiated a routine audit of accounting and reporting under FERC regulations. Due to the events in 2020, we saw that staff extended the audit. I think importantly, there is nothing that was newly identified that the company wasn’t already aware of within the audit itself. And we did that through our own very thorough review of all the matters contained therein. Also the audit didn’t identify any additional lobbying-related expenses for those that had a question around that. As for the details of the key findings, I think I’ll pass that over to Jon Taylor and he can elaborate.

K. Jon Taylor — Senior Vice President, Chief Financial Officer and Strategy, FirstEnergy Service Company

Yeah, Ryan. There’s really just two major findings that really impact our financial plan, that we’ve already really incorporated into the business plan going forward. One was the capitalization of corporate support, and so we factored that into our plan. We still got to get through a time study that’s in process right now, but we have included an estimate of what we think will be the outcome associated with that.

And then the capitalization of Veg Management that also has been incorporated into our business plan. So those are the two primary findings from a financial perspective. And you can see that we provided pro forma return on equities for each of our jurisdictions, which have been significantly lower from where they were on an actual basis in 2021. So I kind of view this as a temporary issue in terms of being able to recover those costs in the future in rate cases that will be filed soon.

Ryan Karnish — JPMorgan — Analyst

Got it, that makes sense. I appreciate the — all the color there. And then just maybe one on the settlement that was kind of announced last night, and I know I appreciate you on [Phonetic] trying to get ahead anything. But just thinking through how we should be thinking about this kind from a process standpoint, and just when we might kind of get kind of incremental updates or announcements on all these different items, the moving pieces that are kind of involved in that settlement?

Steven E. Strah — President and Chief Executive Officer

Well, Ryan, the way I look at the settlement, it’s one more additional step for our Company that to put our legacy issues behind us. And by each action we take in this regard, we continue to rebuild the trust and be able to really focus our entire Company on what is a very bright future with a excellent business strategy and supporting business plan. So I don’t have details beyond what’s contained within the term sheet that that’s been made public. But as events warrant and significant issues are brought forward and moved, we’ll certainly keep the investment community up to speed on that.

Ryan Karnish — JPMorgan — Analyst

Understood. Thank you for taking my questions.

Steven E. Strah — President and Chief Executive Officer

Thank you.

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

Well, thank you. I wanted to thank you for your ongoing interest in FirstEnergy, and thank you very much for joining us today. And please, above all else, please stay healthy and stay safe. Thank you very much.

Operator

[Operator Closing Remarks]