第一能源 (FE) 2014 Q4 法說會逐字稿

Greetings and welcome to the FirstEnergy Corp. Fourth-Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Meghan Beringer, Director of Investor Relations. Thank you Ms. Beringer, you may now begin.

Thank you Manny, and good morning. Welcome to FirstEnergy's Fourth-Quarter Earnings Call.

First, please be reminded that during this conference call we will make various forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities and Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, prospects, and other aspects of the business of FirstEnergy Corp. are based on current expectations that are subject to risks and uncertainties.

A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please read the Safe Harbor statement contained in the consolidated report to the financial community, which was released yesterday, and is also available on our website under the Earnings Information link.

Today we will be referring to operating earnings, operating earnings per share, operating earnings per share by segment, and adjusted EBITDA, which are all non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures are contained in the consolidated report, the updated fact book, and as well on the Investor Information section on our website at www.firstenergycorp.com/ir.

Participating in today's call are Chuck Jones, President and Chief Executive Officer; Jim Pearson, Senior Vice President and Chief Financial Officer; Leila Vespoli, Executive Vice President Markets and Chief Legal Officer; Donny Schneider, President of FirstEnergy Solutions; John Taylor, Vice President, Controller, and Chief Accounting Officer; Steve Staub, Vice President and Treasurer; and Irene Prezelj, Vice President Investor Relations. Now I will turn the call over to Chuck Jones.

Thanks Meghan, and good morning everyone. It's my pleasure to talk with you today. For today's call, we are deliberately keeping our prepared remarks rather brief, so there will be plenty of time to take your questions at the end. Clearly, the topic many of you will be most interested in is our 2015 earnings guidance, which we made public late last evening.

But before moving to that discussion, I'd like to take a moment to thank Tony Alexander for his leadership of FirstEnergy over the past decade. Tony guided our Company through a dramatic expansion, and navigated through one of the most challenging periods in the history of the utility industry. As you know, we also announced last night that Tony's last day will be April 30, and we certainly wish him well as he begins this new chapter in his life, and enjoys more time with his family.

Since moving into the CEO position on January 1, I've had the opportunity to either meet personally or talk with many of you over the telephone. We've had some good two-way conversation over the past couple months. I want you to know that the entire FirstEnergy team is committed to providing frank and open discussion about the challenges and opportunities we are facing as a Company.

That's why, in light of the recent Pennsylvania rate case settlements, we decided to provide you with our earnings guidance range earlier than originally planned, so you would have a clear sense of what we are expecting this year. The 2015 operating earnings guidance range of $2.40 to $2.70 per share is in line with the updated drivers for our utilities business and corporate segment that we provided in November, although some street expectations have not been adjusted to reflect that information.

Looking at consensus estimates, we saw a fairly wide spread of about $0.50, ranging from $2.60 to over $3.10. We understand the challenges of modeling FirstEnergy, given all the moving pieces we have right now. Given the disparity between the street consensus and our 2015 base earnings, we believe it's very critical to ground the investment community on earnings sooner rather than later, as we reset our utilities around a new growth strategy. After today, our focus shifts to customer-service-driven growth across the utility segment.

In that light, now that we have made our 2015 earnings guidance public, following this call Irene and her Investor Relations team will be happy to answer your detailed questions about all of the disclosures we made yesterday and today, including here in our consolidated report, and in our updated fact book.

In the future, once all the pending rate-case proceedings are finalized, modeling our going-forward earnings power should be far more transparent. We hope to better articulate that for you later this year at an analyst meeting, where we expect to provide a growth target for our utilities, as well as an overall strategic update on all three of our business segments.

We continue to believe the initiatives that were put in place during 2014 laid the path for our future growth and success. Let's take several minutes to review the key events of the past year. We successfully launched our Energizing the Future transmission expansion program. Under this program we will invest billions of dollars, with an eye toward servings our customers better. These investments will improve reliability, add resiliency to the bulk electric system, and install enhanced physical and cyber-security to ensure our assets perform as designed.

With our multiple rate proceedings, we have also set the stage for similar investment in our regulated businesses, and more timely recovery of those investments. The recent major storm events that have impacted FirstEnergy's service territory have highlighted a need for hardening of our distribution systems. Of course, in the wake of the polar vortex and other severe weather events last winter, we began taking a far more conservative approach in our competitive business, to limit risk and focus on greater stability.

We have made good progress on these efforts. Our West Virginia rate case settlement was approved by the state Public Service Commission earlier this month, and we have filed settlements in our Pennsylvania and Ohio rate proceedings that require regulatory approval.

We also look forward to closure on the base rate case at JCP&L, and remain hopeful that the Board of Public Utilities final decision in that proceeding will appropriately include the $580 million incurred by JCP&L for the 2012 storms. Once that case is finalized, we look forward to working with the BPU to make Jersey Central Power and Light a stronger company going forward.

In our ATSI proceeding, we believe FERC's approval of our request to move to forward-looking rates as of January 1 signal support for transmission investments for grid reliability. As we anticipated, FERC accepted it subject to refund, and also set hearing and settlement procedures, and initiated an inquiry into ATSI's return on equity. We believe that more timely recovery associated with forward-looking rates is a major benefit to us, which outweighs the impact of a potentially modest ROE adjustment.

This rate structure for ATSI will provide much better correlation to our cost as we continue to implement our Energizing the Future transmission investment plan. That plan is comprised primarily of thousands of small customer-focused transmission projects and equipment upgrades that can be implemented relatively quickly across our existing 24,000 miles of transmission assets.

These projects are designed to enhance system reliability and resiliency for our customers, while providing long-term and sustainable growth for FirstEnergy. I strongly believe that the right investments are those the customers value and are willing to pay for, and that provide attractive returns for our investors. It's gratifying to report on the successful first year of that program.

We overcame some weather-related setbacks early in the year, but by December we successfully completed our plan of $1.4 billion in new investments spanning more than 1,100 projects. You can see the impact of that investment when you look at our financial disclosures for the transmission segment. The plan for 2015 calls for an additional $970-million investment across 430 projects, including 1,000 pieces of substation equipment, and 300 miles of transmission lines. By the end of this year, we expect to be well on track to meet our four-year goal of $4.2 billion in investments through 2017.

Key projects for 2015 include construction of a new substation and transmission line near Clarksburg, West Virginia, to support an existing gas processing plant and reinforce the regional grid. We're also planning construction on a new transmission substation near Burgettstown, Pennsylvania, that will support load growth and improve service reliability for more than 40,000 customers of West Penn Power.

At the EEI conference last November, we told you that we have identified about $15 billion in incremental transmission projects in 2018 and beyond, providing a path to both improved customer service and a long-term and sustainable growth platform for our Company.

Let's shift gears now and look at our competitive business. The actions we continue to take with regard to our more conservative strategy have been very effective at reducing the overall risk in this business. While our open position is subject to market movement, we are structuring the business to be more predictable and self-sustaining. Our conservative approach will better protect us in the event of extreme weather or unplanned outages at a major generating facility. We are projecting this business to be cash-flow positive each year over the 2015 to 2018 period, using conservative assumptions.

I've been asked numerous times about the possibility of divesting this business. Frankly, at this point in time it doesn't make sense, while we are at or hopefully near the bottom of the market, to sell these assets at the lowest value they will likely ever have. In addition, capacity market reforms and pending changes to the treatment of demand response are likely to provide near-term value for this business.

Once these moving pieces play out, we should have a much better picture of what we can expect from our competitive business going forward. At this point it remains a core business for FirstEnergy. However, we continue to monitor closely the financial performance of some of our individual generating units, particularly those located in western PJM. While below-market revenues are built into our financial models, several of our units continue to struggle to run economically.

The strategies we have in place in all three of our business segments are sound. They are the right priorities for our Company at this time and in this environment, and we will continue to refine them as conditions require or opportunities emerge. Along the way, we intend to provide clear communication of our challenges, opportunities, strategies, and goals. I'm sure you'll have many questions at the end of this call, and we have a full investor meeting schedule coming up. I will make myself available as often as necessary to ensure we address all of your questions. I also hope to get to know many of you more in the next several months.

For those of you who are not yet familiar with my style, I was trained as an engineer to solve problems. My career at FirstEnergy has been focused on customers, and looking for sound long-term solutions. Our Distribution & Transmission businesses have been my main focus, although I did have the opportunity to oversee our competitive business for a couple of years, as well.

As I mentioned earlier, in my mind the best investments, like the ones we're making in our transmission business, are those that provide both customers and shareholders with real value. It's our responsibility to provide customers with safe, reliable, affordable, and clean electricity. My philosophy is that a commitment to these principles, reflected in both our decision-making and our management style, is good business.

Lastly, I believe very strongly in transparent communications. Whether to employees, customers, regulators, or the financial community, that means saying what we know when we know it. That's why we decided to provide earnings guidance sooner than originally expected.

Looking forward, we will remain focused on long-term shareholder value, executing our regulated growth plans, and taking a conservative approach to our competitive business. At the same time we, will continue to evolving to meet the needs of our customers who rely on electricity to power their businesses and everyday lives. It's my priority to move FirstEnergy to its next period of growth and success, benefiting our customers, employees, and investors.

With that, I'll turn the call over to Jim for a short review of 2014 financial results, and additional details on our earnings guidance. Following Jim's remarks, we'll open the call to your questions, and we should have ample time to address whatever you would like to talk about.

Thanks Chuck, and good morning everyone. This morning we reported 2014 fourth-quarter operating earnings of $0.80 per share, and full-year operating earnings of $2.56 per share, which was at the upper end of our guidance range. It was a strong quarter and a solid year overall, with numerous achievements.

In somewhat of a change to past practice, I won't cover the results for the quarter in detail by segment, since that information is available in the consolidated report, or from our IR team. Instead, I will speak to the major drivers and events, while leaving more time for Q&A.

For the fourth quarter of 2014, GAAP results were a loss of $0.73 per share. This includes special items of $1.53 per share, of which $1.23 is related to our annual pension and OPEB marked-to-market adjustment, and is a non-cash item. This adjustment primarily reflects a 75-basis-point decline in the discount rate, and revised mortality assumptions used to measure our obligation.

Moving now to our fourth-quarter operating earnings drivers, consistent with the guidance we provided at EEI in November, the FirstEnergy consolidated effective tax rate was 21.6% in the fourth quarter of 2014, predominantly reflecting a tax benefit associated with the resolution of state tax position. This drove a quarter-over-quarter benefit of $0.12 per share, of which $0.10 was included in the Corporate segment.

At our regulated utilities, overall distribution deliveries decreased fourth-quarter earnings $0.01 per share. Total deliveries were down slightly, primarily driven by milder weather, which drove a 2.5% reduction in residential sales quarter over quarter. Industrial sales were up 1.8%, the sixth consecutive quarter of growth in that sector. On the transmission side, we reported fourth-quarter operating earnings of $0.14 per share, in line with our expectations as we ramped up our Energizing the Future initiatives.

At our competitive operations, results came in slightly better than expected for the quarter. Commodity margin was down $0.08 per share, primarily by due to lower contract sales that resulted from the change in retail strategy, as well as mild weather. These factors were partially offset by higher-capacity revenues related to the increase in the auction clearing prices.

Let's move now to a short overview of some of the key earnings drivers for 2014, which included a 6% earnings improvement in our transmission segment year over year, as we launched our Energizing the Future initiative. On the competitive side of the business, we experienced a year-over-year earnings decline of $0.51 per share due to the extreme weather events early in 2014, partially offset by the actions we put into place to reposition our sales portfolio, and effectively hedge our generation by reducing weather-sensitive loads. Adjusted EBITDA was $653 million, in line with our expectations.

At our regulated distribution utilities, we reported 2014 operating earnings of $1.93 per share, in line with the mid-point of guidance we provided in November. We saw the full benefit of the West Virginia asset transfer, but also rising expenses for maintenance, depreciation, general taxes, and interest, without the commensurate recovery in rates. However, as Chuck said, new rates that we expect to be effective in 2015 will reset the baseline for a majority of our utilities.

Distribution deliveries increased 1% compared to 2013, on both an actual and weather-adjusted basis. Industrial sales were up each quarter, and ended the year up 2%. At our Corporate segment, we benefited from multiple tax initiatives, and ended the year with an effective income tax rate of 29.3%. As we have previously discussed, we anticipate an effective tax rate of approximately 37% to 38% in 2015.

Let's now move to a discussion of some of the 2015 operating earnings guidance details. On the regulated utility side, which is where we believe most estimates did not fully account for the increases in ongoing expenses such as depreciation, interest, and taxes, we expect a mid-point of $1.82 per share. This includes new rates in West Virginia, which will be effective this month, and our expectation for new rates in Pennsylvania, which would be effective in May, based on the pending settlement.

For New Jersey we assumed revenues neutral to 2014 levels, but included $0.08 per share for amortization of deferred storm costs for both the 2011 and 2012 storms. We expect moderate load growth and distribution sales of about 1%.

Commodity margin at our competitive operations is expected to increase by $0.44 per share in 2015 compared to 2014, primarily due to higher ATSI capacity prices. For 2015, our committed sales currently are 67 million megawatt hours. Our 2015 adjusted EBITDA for the competitive business has been revised to $875 million to $950 million, a slight decrease from our previous range, given the drop in power prices since November.

At our transmission segment, this year we expect an uplift of $0.11 per share related to the implementation of forward-looking formula rates as requested in our FERC filing, and higher rate base at both ATSI and TrAIL. Although FERC has initiated an inquiry related to our ATSI ROE, we anticipate the range for that segment should accommodate the outcome of that process.

At corporate, a combination of a more normal effective tax rate, coupled with increased net financing cost, is expected to reduce 2015 operating earnings by $0.42 per share, in line with the drivers we provided at EEI. Last evening we published detailed information regarding our 2015 guidance on our fact book, which is posted on our website. With that, I'd like to open the call for your questions.

Thank you.

As promised, we have 35 minutes left for questions. (laughter)

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

Neel Mitra, Tudor, Pickering, Holt.

Jim, I had a question on the O&M expense at the regulated utilities. It seems to go up $0.08 in 2015, and then in your drivers in 2016 it looks like it's flat. Was just wondering what's causing the increase in 2015, and maybe what's the normalized run rate on a percentage basis for increases going forward?

Going forward, Neel, I would say our O&M's going to be pretty much consistent with what we are reflecting in 2015. In 2015 we're seeing some additional O&M expenses associated with some of our rate filings and vegetation management, mostly. That would be the primary driver.

Vegetation management's a big piece of it. In light of the major storms we saw, we've been spending a lot of money reclaiming our right of ways and expanding our right of ways, which has been capital expense. We're going to be shifting more into a more typical four-year trim cycle, which is going to shift some of that back to O&M.

Right. In 2016, it looks like it shows as neutral. Does that mean you expect it to be flat, or do you expect a consistent percentage increase as 2014 to 2015, between 2015 into 2016?

No. In 2016, Neel, we would expect that O&M to be flat to 2015.

Okay, great. Is there any kind of update on the timing of the Ohio PPAs, as far as when we get a decision, and whether that would be before RPM?

Hi Neel, this is Leila. The procedural schedule flipped in Ohio a little bit. We now have FirstEnergy's supplemental testimony being due on March 2, as well as intervener testimony and staff testimony on March 27, and hearings on April 13. Given that we've asked for -- originally asked for an April 8 decision date, obviously that is not going to happen. But from our standpoint, I still think we're in a good place.

Originally we had asked for the April 8 day to accommodate two things. If you think about it from an FES perspective, FES needs to know whether they have this generation and how to hedge it, so we need it at a reasonable period of time to allow FES to be put into position to sell it. Also, with regard to the RPM option. I think given the schedule the way it is now, FES is going to have to bid those units in, along with the rest of the competitive generation. It's just a missed opportunity for the utility side to do that. But again, I don't think that a critical thing, it would've been a nice to have thing.

That's it with respect to the schedule for us. As you may know, AEP has a case dealing with the PPA coming up. I understand the decision will probably come out in the next two to three weeks or so, and I'm hopeful that will bode well for a decision in our case.

Great. Thank you very much.

Dan Eggers, Credit Suisse

Good morning, guys. Chuck, I think Jim hit it well that probably a lot of us in the industry were surprised by some of the expense lines at the utility. If you look at the earned ROEs for the different jurisdictions, how do you think those ROEs look in 2015 versus what you expect going forward? Meaning, are you going to see improvement in ROEs beyond this year, or have we normalized at this ROE level?

Well, Dan, here's what I would say. Obviously, I think given fiscal policy in our country, there's going to continue to be pressure on ROEs as long as interest rates stay low. But absent regulatory action on our part, I don't see any way that those are going to change. Once we get through Pennsylvania, we figure out where we end up with ATSI, and we get through New Jersey, I think we are going to be in a pretty stable place there.

I expect later this year when we do an analyst meeting that we'll be able to give you a little more transparency into what those ROEs are company by company, other than where we did the rate-making in a black-box type environment. Hopefully we'll give you more clarity on that later this summer.

Okay, maybe I asked that a little more clumsy than I meant to. From an earned ROE perspective, you look at the different utilities, and particularly with rate cases having gotten resolved, should the earned realized ROEs level out at what you are expecting in 2015 guidance, or do you look at things in 2016 and 2017 that could allow your earned ROEs to improve?

I would think they are going to certainly level out at where we're at in 2015. I expect over time there will be some modest improvement.

Okay. Jim, on the operating expenses being higher on the utility side than we expected, the pension and -- or the OPEB and depreciation expenses seemed to stand out, from our math. Can you just talk about what was underlying some of those increases year on year, and how we should think about those going forward?

Yes, let me start with the pension OPEB line, Dan. That's primarily driven by the absence of a credit that is expiring over the 2014, 2015 time frame. Then you have slightly higher pension expense associated with the mortality tables. That's what drove the reduction in that line. From an increase in what I'd say the depreciation and property taxes, when I look at distribution that's pretty consistent year over year.

If you look at 2013 to 2014, depreciation property taxes increased about $0.09. We're showing about $0.08 increase 2015 to 2016. When you think about it, we're spending about $1.4 billion, $1.3 billion annually at our distribution Company, and we have about $650 million of depreciation, so we're spending more on our depreciation there. I would look for that type of a consistent increase in depreciation and property taxes.

From the transmission side, we showed a increase in depreciation property taxes of about $0.03 2013 to 2014. That was showing the ramp-up of our Energizing the Future program. We spent $1.4 billion in capital in 2014. We're expecting to spend just about $1 billion in 2015. That $0.11 increase in property tax is really associated with that increased capital, and essentially the timing of when it goes into service.

Okay, one last question. On the transmission side with the CapEx down this year versus last year, I know that was part of the plan you laid out in the fall. But because there are lots of smaller projects, what could motivate you guys or allow the opportunity for you to spend more money in 2015 than you've budgeted so far?

I don't think we're going to spend more money in 2015 than we budgeted. I wouldn't want to lead you with that impression. One of the critical aspects to that plan quite frankly is getting the work force to be able to construct these projects. There is a constraint on that across our nation but we have locked in through a partnership with Quanta, a work force that will be available to FirstEnergy well into the future. I think that it makes sense to approach this in a steady, predictable fashion. The drop-off from 2014 to 2015 is due to the fact that we had a number of reliability projects that PJM ordered as a result of late plant closings that we're finishing up on putting in service early this year.

Great. Thank you, guys.

Paul Patterson, Glenrock Associates.

Good morning. Sorry about that, can you hear me?

Yes, we can hear you, Paul.

On the $0.30 for transmission that you guys are projecting for 2015, how much of that is in the ATSI forward treatment that you guys are expecting? On that FERC order, as I recall, my understanding was they really hadn't signed off on the forward test-year treatment, correct me if I'm wrong. I know there's settlement discussions which they encouraged, and I think they're still going on. Can you give us any flavor for that, as well, in this context of the Ford test-year stuff?

Hi Paul, this is Leila. I will answer the latter part of the question first, and then turn it back over to Jim. You're correct, we are in the settlement process associated with that. There has been no set procedural schedule, although if things stay in line, you might expect a decision in that case maybe late this year or slipping into the first quarter of the following year. With regard to the rates, they have not blessed the forward-looking test year. What they did is put the rate into effect subject to refund. January 1 we started it, and I think the refund date was something like the 12th or 13th of January. That's where it stands from a procedural schedule standpoint.

Paul, to your first question, that $0.30 up-tick in revenues there, the majority of that would be associated with ATSI and the forward-looking test year.

Okay, but you guys feel confident with respect to your settlement discussions and what have you about the forward test-year treatment? Leila, is that fair enough to say?

I think if you look at past precedent at FERC, I think the forward-looking test year part of it, even though that is an issue that the parties raised, is something that from my standpoint I feel very comfortable on. Some of the other things they're looking at -- what interveners allege is gold-plating the system. They are also looking at the protocols for a true up.

From my standpoint, especially given how Chuck described what it is we're doing and the reliability aspects of this, I feel very comfortable where we are. The one thing we have always highlighted is the rate of return and the fact that we thought that would be an issue. Notwithstanding that, we felt it appropriate to go in with the formula rate. If you want to think about it every 100 basis points is about $16 million. If you can look at past precedent, you can do your own calculations with regard to that.

Okay, great.

Paul, I just want to point out, and I'm sure you understand this; but because the 2014 expenditures were in a lagging rate mechanism, and now the 2015 expenditures are in a forward-looking mechanism, what you're seeing in terms of the shift in earnings from 2014 to 2015 really is two years worth of expenditures. That's not the number you can expect to see going forward.

Great. Thanks for the clarity, guys. Chuck, you mentioned in your remarks that you wanted, I believe, the merchant business to be more self-sustaining, also that you thought the market was at a very low price and low power prices and what have you, and it would be the wrong time to divest the business if that were the case.

The question I have is A, if your market outlook changed would you be willing to perhaps look at breaking off these companies if it were possible; and B, what's your appetite for additional investments, perhaps, in merchant? In general, how do you see the merchant arm of this business, which is clearly very different than the rest of the business, how do you see that strategically going forward? Do you see a possibility of a spin-off, or in general how should we think about how you're really looking at this business, and what you might do strategically to enhance value?

Here's how I'm thinking about it. I've told several others when I've gotten asked this question, I learned a long time ago never say never and never say always, so things can change. For now, we're looking at running that business in a mode where we remain cash flow positive, where we use those market changes that are coming to take that cash and begin retiring some of the holding company debt that's associated with that business, and over time put that business into a position where we can have more flexibility in how we look at it.

Then if you can tell me what the market's going to be like in two years, three years, four years, I think I could answer what I would do depending on what that market is like, but I don't think anybody can tell us what that's going to be. Right now we're heads down. We're committed to running at cash flow positive, and we're committed to de-risking it, so that it doesn't continue to be the conversation when 80% of our Company is regulated and generating -- absent today -- and getting everybody in line with where we're at, generating consistent, predictable, regulated earnings. That's the plan.

Okay, thanks so much.

Manny, before we move forward, I was handed a note when I was giving Dan an explanation on the increases of depreciation year over year. I said an increase 2016 versus 2015. I should have said 2015 versus 2014.

Thank you. Angie Storozynski, Macquarie

Thank you. I wanted to go back again to the distribution earnings. We are clearly missing a piece here. You've just gone through rate cases in Pennsylvania and New Jersey and West Virginia. You knew what is your cost structure going into these rate cases. You showed us what is the pre-tax impact of the rate case settlements or decisions; and yet we have all of this $0.25-plus drag from higher costs from the distribution side. Shouldn't that have been already reflected in the rate cases that you have gone through? Also, is this just an attempt to basically reset the base for future growth of this business, and as such there's incremental O&M spending that basically is not recurring?

Angie, this is Jim. Some of the expenses that we had incurred was to prepare us for these rate filings that we had. As I said earlier, we would expect that our O&M is going to be held flat going into next year. We will be realizing the full impact of all of those rate filings next year. As Chuck said earlier, I would look at 2015 as our baseline that we are going to start growing those distribution earnings from that point, and we will be set to provide more clarity on that at the Analyst Day meeting that we have.

Okay, but can you at least give us a sense is this a growth that other regulated utilities can offer? Is this a meaningful step-up starting in 2016 for distribution?

At this point we are not giving any type of 2016 guidance, but this is the baseline that we would expect to start showing growth at our distribution utilities. I don't think we're going to put a percent out there yet until we fully understand what's reflected in all of the regulatory outcomes, and that we're comfortable and confident that we'll be able to deliver on that.

Okay.

We've got some work to do here. We have a settlement but it hasn't been approved by the PA regulators. I don't think it's fair for us to assume that we've still got work to do in New Jersey, and obviously we have a big case pending in Ohio. Once all that settles out, then I think we're in a better position to decide what's our investment strategy going forward, what's our plan for each of those states going forward, and that's what we plan to tell you later this year, once we get all those answers.

Okay, thank you.

Stephen Byrd, Morgan Stanley.

I wanted to follow up, I think really on Paul's question on the sort of market outlook. You all are fairly physically close to a lot of the shale gas activity, and we've seen a lot of development of shale gas. I'm at a high level interested in your market take in terms of what the growth in shale gas really means longer term for power prices? What's your expectation? It sounds like from Chuck's earlier comments that you are relatively bullish on power prices relative to the forward curve. I was curious how you think about the dynamics from the shale gas that we are seeing being developed right around in your territory?

Well first of all, I'm not sure what I said to make you think I was bullish on forward-curve power prices, because that's quite to the contrary. I think as we look at the shale gas issue, we have to look at it a couple different ways. The first way is on those forward price curves, and we actually had IHS in yesterday to talk to us about their views. I think for the foreseeable future we're not expecting any significant up-tick in those forward price curves, so we are structuring our competitive business around those forwards as we know them.

The other side of that coin is it's the economic development engine that is driving growth in our territory. Over the next few years, we expect to connect over 1,000 megawatts of new load, directly attributed to the mid-stream part of that business. There are discussions under way about up to three cracker plants in our region. If any or all of those come to fruition, I think those are the foundation for an industrial revolution in the part of the country that we serve. That's the up side long term. The reality short term is we expect gas prices to stay fairly low.

There's some congestion in the gas markets that's going on right now, but there's also roughly $20 billion worth of gas transmission projects that are under construction and expected to go in service over the next few years that will relieve some of that congestion, and eliminate some of the basis difference between our zone and the rest of the country. That might have a modest change, but all in all, we're planning to run our regulated business around the market forwards as we see them today.

Okay, great. I wanted to touch base on your hedging strategy, given everything you are seeing in the market. Any changes in terms of your thinking in terms of the volume you would like to hedge, or given what you've said about your market outlook? Any changes we should expect in terms of how you all think about hedging your generation fleet going forward?

I would say no. What I said in my prepared remarks was we structured that business in a way where we are trying to expose risk to volatility as associated to weather, and to protect ourselves against an unplanned generator outage. We have the ability to generate 80 million to 85 million megawatt hours a year. We're going to sell something less than that, so that as the load fluctuates with weather, our committed load fluctuates with weather, and/or we have issues that any of our plants, we have the ability to cover ourselves.

That will -- I understand we're likely giving up some earnings potential from that business by taking risk out of it. But as I said earlier, I'd rather make it more predictable, more stable, and get it out of the conversation as much as I can, so we can talk about the type of Company FirstEnergy really is, which is a large regulated utility was 6 million customers.

That's very clear. Lastly, very briefly, we've seen some relatively extreme weather through the winter time. In general, how has the fleet performed through this winter period that you have seen? Have you been satisfied with the performance of the fleet? Anything compared to prior years in terms of performance trends?

I would say our fleet has performed very well. The markets have not. We had two units at the Bruce Mansfield plant that didn't run for six days in the last two weeks because the LMP at those plants we couldn't make money, so we didn't run them. But the plants are available. They are running well. Our generation team has done an amazing job between last year and this year getting ready for this winter.

Great. Thank you very much.

Julien Dumoulin-Smith, UBS.

Congratulations again. I really wanted to focus on the transmission side of the business, specifically the guidance. What are you guys assuming in terms of an earned ROE. I know that may be awkward in the context of your pending case for ATSI, but can you give us a sense how much lag is embedded in that number? As you turn towards a forward-test year and implementing that and a run rate for 2016, what kind of improvement should we be thinking about there, and what's ultimately reflected in 2015, specifically?

All right, I'm not sure if I got all those. I'm going to answer the first question, and then you can answer -- ask them one at a time. It will be easier for me to follow. But the first question on -- we get that question a lot. What are we assuming about ATSI's rate of return going forward, and here's how I view this. We just got FERC's approval January 1 to move forward. There's a case now that's going to be had, and there's a settlement process that's going to be had.

My view is we're going to go into those arguing why 12.38% makes sense going forward, and is stimulating the type of investment and reliability that I believe FERC should want. That's our going-in position. Anything from there, I give you a number and we're going to be negotiating from that number. We're not going to give you a number. We're going to go into that settlement process, and we're going to make the best case we can to make sure that we get the right return for our investors, so that we can continue making these investments in the way that we are.

But from a regulatory lag perspective, what are you assuming, if you can talk to that?

Regulatory lag, we're assuming forward-looking rates.

Okay, so there's not necessarily improvement next year as you have a full year, or what have you?

No.

Got you. In terms of the outlook for transmission CapEx, how are you feeling about flowing dollars into transmission versus distribution? Can you elaborate a little bit on where you see capital going in the future? Subsequently, I know we discussed this before on the distribution side, what kinds of future investments do you see now that you've gone through or about to go through all the state utility rate cases?

Let's take transmission first. We've told you about $4.2 billion over a four-year period that we're in the second year of. It was $1.4 billion in the first year. It's $900 million and some the second year. After two years we'll be right on track to be halfway through that. For 2016 and 2017, that's going to be the number.

We have $15 billion worth of projects in addition to those that are in the four-year plan that we can execute, that hopefully I'll be in a position when we talk to you later this year to articulate more of a long-term strategy for transmission and what we're planning to do there. But for the foreseeable future, the numbers we've given you is what my plans are. I think one of the things that I have to start doing is saying what we're going to do and then doing what we say. I don't expect any change in that over the next couple years.

On the distribution front, the rate cases in Pennsylvania are a huge step. It re-bases those utilities, and it was a necessary step if we decide to make reliability improvement investments in Pennsylvania. Pennsylvania has a methodology that's available to us called the DISC that we can make investments. But as I told you when you came in, we've got to get through these rate cases first, and then we'll make decisions there. In my prepared remarks, I said once we get through the base rate case in New Jersey, then I look forward to sitting down with the BPU and working together to figure out how we make JCP&L stronger going forward.

In Ohio we have a DCR mechanism that we have been using to invest in those utilities. Later this year -- I know you want numbers. I'm not prepared to give you numbers today. But later this year I think we can lay out a strategy of how much and where we plan to invest to start using our distribution utilities to improve service to customers and improve the picture for shareholders at the same time.

Got you. You're interested in using the DISC mechanism, to be clear, in Pennsylvania?

I think we will definitely look at it once we're done, and then decide is that the best way, and does it allow the right investments. Because more importantly to me is making the right investments that truly benefit customers. If that makes more sense to make them and just have traditional rate cases, then we'll go that way. But to me, we have to lay out what the plan is for customers first, and make the right investments. If that can be done under the DISC, than the DISC would be a smart way to do it.

Great. Thank you.

Anthony Crowdell, Jefferies.

Hi, good morning. More of a long-term-view question. Earlier in your remarks, you had said you were not interested in selling the generation assets, and I may be paraphrasing. You thought it was at the bottom of the market. But if I think three to five years, if you're locking up the assets now in some type of regulatory agreement, aren't you locking that in at these depressed prices? Don't three to five years we'll not be able to benefit if there's a power price recovery?

Well, let me opine a little bit on what's going on in Ohio. I am of the belief that long term those states that remain fully regulated, when you have the ability to optimize between generation, transmission, and distribution, you're going to serve customers best. Some of our states chose to go to competitive markets. This whole discussion in Ohio is around whether or not we trust regulators better to look out for the long-term interest of customers, or whether we trust markets better to look out for the long-term interest of the customers.

Those states that are net importers of generation end up with the highest costs, and don't have the ability to optimize between those three segments. If the PPA is successful, we're basically taking those plants and turning it over to the regulators to regulate them again. They will have a chance to look at how we run them, to look at the prudency of our expenses. But we're saying, I think, we trust the regulator to look out for the future of Ohio more than we do the markets today.

Great. Thanks for taking my question.

Ashar Khan, Visium.

Most of my questions have been answered. I just wanted to thank Tony for his leadership during a very hard period. I wanted to congratulate you on your taking over the responsibility of the new position. Thank you.

Thank you. I'm sure Tony does, too, and I'm sure he's listening. We don't have a microphone in front of him, but I'm sure he's listening this morning.

Paul Ridzon, KeyBanc.

I think you made a comment about 100 basis points of ROE at ASTI. Was that $16 million of net income?

That was a comment I made, and -- pre-tax, yes.

Pre-tax, okay. Then I know you're not going to give a growth rate, but given the moving pieces we have with the timing of Pennsylvania rates coming in and New Jersey, do you think 2016 will be a step up from 2015? On the regulated side, obviously. Competitive is going to be very volatile.

2015 only includes 7/12 of what Pennsylvania is worth, so in 2016 it will be a full year's worth of treatment. Beyond that, we need to see where we land in New Jersey and Ohio.

Okay. What was your assumption as far as New Jersey and guidance?

What we assumed in the guidance, Paul, was that it would be revenue-neutral, and that there would be $0.08 of storm cost amortization associated with the 2011 and 2012 storms.

Effective when? Is that going to bleed into 2016, as well?

That would be effective March 1, so you might have slightly higher amortization year over year.

Any sense of when you're going to hold your Analyst Day?

Not yet.

Okay, thank you.

It will be after we have a decision in Ohio, a decision in New Jersey, a decision hopefully on ATSI. Then we'll go from there.

Okay. Thank you very much.

Brian Chin, Bank of America.

About a year ago the Management team had expressed a possible interest in looking at the REIT structure for transmission growth opportunities. Given now that there is an entity out there that you can see what the cost of capital is like, I wanted to see if you could give us an updated sense of that? Chuck, also, any comments you have there on your perspective?

I'm not sure -- we are always looking at any option that's out there, but I'm not sure that we saw at that time or see today any real benefit to a REIT for our Company. Our Company's a little complex in terms of we've got transmission that's inside utilities, transmission that's inside ATSI, transmission that's inside TrAILCO, the transmission that's inside ATSI. The real estate is owned by the utilities. I think it's a distraction that would take a lot of time and effort of the Management team to figure out that we don't need to be looking at right now, because it doesn't provide any significant long-term financial advantage for us.

That's very clear. One additional question. You had mentioned in your prepared comments PJM West plant thoughts, and some plants appear to be a little bit more struggling here. Is the primary criteria that you are thinking about cash flow accretion? It seemed to be you were leaning towards trying to get the merchant generation business to be cash-flow positive. Is that really the criteria we should be thinking about from a plant-by-plant perspective here?

We have the merchant generation business cash-flow positive for the next four years at market forwards as we know them, and with capacity as we know it. That's not a goal. That's where we're at. As we see the changes that are happening with the capacity market reforms, that's going to be additive. We've put ourselves in a position with our generating suite that we're not forced to generate because we have load commitments. We've got a significant amount of our generation that's going to be market-driven generation.

That gives us the ability, like I said two weeks ago, to say if Mansfield's not in the money, we're not going to run it and lose money. We're owing to optimize it, and that optimization is something that we're going to do day in and day out. We're going to -- more as we look at any options on the retail side as new customer opportunities present themselves, but the goal is cash-flow positive, and we're there. Then beyond that, we want to obviously drive it more cash-flow positive so we can start getting additional flexibility in that part of our business down the road.

Thank you very much.

Manny, we have time for one more question.

Michael Lapides, Goldman Sachs.

Hi, guys. Thanks guys for taking my call this late in the hour. Just thinking about the balance sheet and capital structure, you guys did a really good job year and a half or so ago of reducing the debt levels at the competitive business. You now are in a position where you've got a lot of debt at the holding company level, and a lot of it is short-term or floating rate. Many economists would argue that short-term debt is probably at its all-time lows, and that directionally, short-term debt is likely heading higher.

Do you have any thoughts in terms of how you can deal with the significant amount of short-term debt that's on the balance sheet, meaning whether you would term it out, and therefore lock in a long-term interest rate for that and give yourselves some multi-year certainty of that, or would you potentially pay it off? If so, where would you receive the proceeds, or how would you generate the proceeds to pay down some of the debt?

Michael, at this point I think we need to see how a number of these initiatives play out. If you think about the PPA in Ohio finalizing the rate cases, the potential for the capacity performance product, I think that will give us a much clearer sense of what our cash projections will be going forward. At this point, we have no plans to term out any of the long-term debt that is sitting at the hold co.

I do agree with you that we are carrying more debt at that level than either Chuck and I are comfortable with. But as we lay out our long-term plan going forward, it will be our intention to strengthen the balance sheet, and with that, reducing some of that debt at the holding company. But at this point, I cannot give you a specific plan to do that until we know some of the outcomes of these major initiatives.

Got it. Thanks, Jim, and Chuck, congratulations.

Thanks, Michael. Okay, I'd like to thank you all for your continued support of FirstEnergy. I think our goal today was to give you a clear and transparent view of our Company, and to build the foundation for our growth strategy that we will lay out in more detail later this year at an analyst meeting. I'm proud to have the opportunity to take over for Tony. I'm proud of our employees at FirstEnergy, because I truly believe they are what makes our Company strong. I'm thankful for our 6 million customers, and obviously all of our investors. Take care, everyone.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.