第一能源 (FE) 2015 Q1 法說會逐字稿

Greetings, and welcome to the FirstEnergy Corp. first quarter 2015 Earnings Conference 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 like to now turn the conference over to your host, Meghan Beringer, Direct of Investor Relations for FirstEnergy Corp. Thank you, Ms. Beringer, you may begin.

Thanks, Kevin. Welcome to our first earnings quarter call. Today we will make various forward-looking statements regarding revenues, earnings, performance, strategies and prospects. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results or outcomes to differ materially from those indicated by such statements can be found on the investor 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 are also available on our website. Participating in today's call are Chuck Jones, President and Chief Executive Officer, Jim Pearson, Senior Vice President and Chief Financial Officer, Leili Vespoli, Executive Vice President Markets, and Chief Legal Officer, Donny Schneider, President of FirstEnergy Solutions, Jason Petrik, our Corporate Assistance Contrikkerm 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 a pleasure to speak with you today. We had a good quarter and we're off to a great start for the year. Since our last call in February we have continued our work to position FirstEnergy for solid predictable and customer service driven regulated growth. This morning we will talk about our progress on those strategies. We will also discuss other key initiatives including an important effort that is underway to reduce our cost structure and drive improvements to our balance sheet. And, of course, we will review our first quarter financial results and operational performance. Similar to our last call we intend to keep these prepared remarks brief to allow ample time for your questions before the end of the hour.

Our first quarter operating earnings of $0.62 per share are slightly above the top end of our guidance range and give us a solid foundation to start the year. We benefited from the growth in our transmission business and solid distribution performance that was assisted by a second year of unusually cold weather. Our year-over-year results also reflect the actions we began taking in the second quarter of 2014 to reposition the retail sales portfolio in our competitive business. For the past year we have talked about the extreme weather events of 2014's first quarter and the impact those conditions had on our competitive business and our strategy.

The first quarter of 2015 was even colder with heating degree days totaling 21% above normal and 2% higher than 2014. The PGM market also set a new winter peak of 144,000 mega watts exceeding the previous winter peak which was set in January of 2014. In our competitive business, however, the difference in our results between this winter and last is striking. This improvement speaks to the benefits of our more conservative strategy which includes three major components.

First, selling no more than we produce in order to maintain an open position of at least 10 million to 20 million mega watt hours annually to protect against extreme weather, unplanned outages or a combination of both. As a result of our actions to strategically reduce load obligations our 2015 retail and polar obligations are expected to be about 68 million mega watt hours compared to 99 million mega watt hours in 2014. Second, reducing exposure to weather sensitive load.

From January of 2014 through March of 2015 our overall retail obligations are down nearly 35% on an annualized basis with much of that coming from serving fewer of the most weather sensitive residential and small commercial customers. And finally, a more rigorous commitment to economically dispatching our units. This strategy, together with improved plant operations, helped to mitigate the potential downside from this years severe first quarter weather and demand conditions even though our region experienced four more below zero days this February than last January.

As contracts continue to roll off we expect a further decrease in our annualized retail load obligation through the end of this year and much of that decline will be associated with the most weather sensitive load. As I have mentioned to many of you previously, we recognize that reducing risk in the business also means that we're likely giving up some earnings potential, but as we have said, our objective us to make the competitive business more stable as we focus our efforts on growth in the regulated businesses. In that regard the last few months have been a busy period for our energizing the future transmission investment program.

We are nearing completion of projects that are designed to maintain service reliability in the wake of plants deactivation's in northern Ohio. Those plants ceased operations for good on April 15. These projects included the Bruce Mansfield Glenwillow project, a 195,000,345 kilovolt transmission line extending 119 miles from western Pennsylvania to suburban Cleveland scheduled to go in service by June 1.

In addition, we are preparing to energize new 345 kilovolt substations and associated transmission upgrades in Wood, Trumble, and Stark which are designed to maintain service reliability in northern Ohio after the plants are closed. We also continued our work to strengthen the grid to help protect it from storms and make network and physical security upgrades.

Finally, we are on track with our planned investments on projects that will support the midstream gas operations with about $365 million in the pipeline through 2019. On the regulatory front our rate cases in New Jersey and Pennsylvania have concluded. In Pennsylvania we were pleased that the PUC accepted our rate plan settlements for each of our four utilities in the state. The new rates, which will be effective on Sunday, will help our operating companies continue to enhance reliability and service to our Pennsylvania customers.

We are looking at further options for customer focus investments going forward including the option to possibly request a distribution system improvement charge to recover the costs of those investments. In New Jersey we received recovery of approximately $580 million in costs incurred by JCP&L for 2012 storms and we are glad to have the long process an uncertainty behind us. Now, we look forward to working with the BPU as we set a course for our future infrastructure and reliability investments at JCP&L. We have had a good and productive start to the year and we are making solid progress toward our long-term goals.

Looking forward there are still three major initiatives under way that will ultimately help shape our Company and our strategies going forward. First, in Ohio the hearing on our Electric Security Plan has been delayed by 60 days and is scheduled to begin on June 15. As you know, in its recent decisions on the AEP and Duke cases the PUCO ruled that stability riders related to purchase power agreements similar to our proposal are legal in Ohio. This was an extremely significant outcome.

We believe that our filing includes a robust case for how our proposal benefits utility customers and supports economic development in the state. On May 4, we expect to file supplemental testimony to further demonstrate how our plan meets the factors outlined in the AEP and Duke cases. While we are comfortable with the new schedule set by the PUCO this schedule will affect the timing of our Analyst Meeting which we had hoped to have this summer. We believe that it makes sense to host this meeting after we receive a decision in Ohio which pushes us to some time late this year.

The second open matter that could have a significant impact on our business is the PGM capacity performance proposal. PGM has addressed FERC's questions into the structure of the product. Pending its final decision FERC granted PGM's requested waiver to delay the May capacity auction to no later than the week of August 10. We appreciate the care and long-term perspective that FERC is taking in its review of this important mechanism and expect that both PGM and FERC are interested in reaching a resolution as soon as possible.

In both of these matters we look forward to a final outcome that produces better clarity for our Company and produces benefits for electric consumers in our region. On a related item, as you know, we had delayed our decision to construct a new de-watering facility for our 2,400 megawatt Bruce Mansfield plant in Pennsylvania while we evaluated the plant's future, particularly with respect to the results of the next capacity auction.

We will continue to monitor market conditions but given the current environment, including the auction delay, we think it makes sense to move forward with some early aspects of this project. This work is designed to preserve our ability to continue operations as a plant after December 31, 2016. All costs associated with this project are in our current business plan. We, of course, intend to remain sharply focused on those things we can control including our own spending on goods and services, operating expenses and other corporate spending as well as capital expenditures.

Last month we launched a cash flow improvement project intending to capture both immediate and long-term savings opportunities that are meaningful and sustainable. A team led by FES President Donny Schneider is working to identify savings and process improvements across the Company with a particular emphasis on our generation business.

The team is focused on expense reductions, capital expenditures and inventory. We are also working with an outside consultant to examine the significant savings potential in our supply chain. With more than $2.5 billion in annual spending in the project scope we believe that significant cost savings opportunities are available while continuing to successfully serve the needs of our organization, customers and employees. I will note that workforce and benefit reductions are not exclude in the scope of the project. In all, we are targeting $50 million in savings this year and an additional $150 million in 2016 reaching a run-rate of $200 million by 2017.

We expect that the savings will be split about evenly between OEM expenses and capital expenditures and help us create sustainable levels for the future. By appropriately addressing our cost structure we can help direct our future and move FirstEnergy to a point that our fundamental operations make the Company stronger while improving the balance sheet over time. We're off to a solid start in 2015. Our early financial results together with our progress on our strategic initiatives are building a solid foundation for the year and for the future of our Company.

These results and our outlook for the remainder of the year continue to support 2015 operating guidance in the range of $2.40 dollars to $2.70 per share. Consistent with the leadership philosophy I have shared with many of you I would like to narrow the gap between our GAAP and non-GAAP results. While some differences are expected we are diligently focused on earnings quality.

Now we will turn the call over to Jim for a brief review of our first quarter financial results. Then we will open the call to your questions.

Thanks, Chuck, and good morning everyone. Consistent with our approach in the last call I will use my time today to speak to the major drivers and events of the first quarter. This information is detailed in our consolidated report which is posted to our website and we would be happy to address any specific questions in the Q&A or after the call. As Chuck said, this morning we reported strong 2015 first quarter operating earnings of $0.62 per share, which compares to $0.39 per share in the first quarter of 2014. On a GAAP basis basic and diluted earnings for the first quarter of 2015 were $0.53 per share compared to 2014 first quarter basic earnings of $0.50 per share, or $0.49 per share on a diluted basis.

We're off to a good start for the year. First quarter 2015 operating earnings were fairly clean and simple. As expected we benefited from improvements in our competitive business as well as increased transmission revenue which were partially offset by a higher effective income tax rate in our corporate segment. From the standpoint of our first quarter guidance we came in above the range we provided largely due to the impact on our distribution business of extremely cold weather in late February and March.

Compared to the normal weather that we include in our guidance first quarter wires revenue benefited by $0.06 per share as a result of heating degree days that were 21% above normal during the period. This was offset by about $0.03 per share related to weather impacts at our competitive business. First quarter operating earnings also benefited by a net $0.03 per share compared to guidance primarily as a result of the New Jersey storm amortization delay and incremental revenue from our TrAIL transmission investments.

Overall, distribution deliveries increased slightly compared to last year reflecting the weather as well as modest growth in our customer base offset by the impact of lower average customer use associated with energy efficiency. Residential sales were flat compared to the first quarter of 2014 but down 1.7% on a weather adjusted basis while both actual and weather adjusted commercial sales increased slightly. Industrial sales were also up slightly marking the seventh consecutive quarter of growth in that sector. While soft natural gas prices are deterring some new entrants into the shale gas fields, our conservative estimates continue to support more than 1,000 mega watts of new load from midstream businesses through 2019.

The shale slowdown contributed to softer first quarter demand from the steel sector. However, most of the other key sectors in our region remained solid. In our transmission business first quarter operating earnings were $0.17 per share reflecting incremental rate-based growth at both ATSI and TrAIL and forward-looking rates at ATSI beginning January 1 this year partially offset by higher depreciation taxes and interest expense. As Chuck described our competitive business was able to more effectively navigate there years extreme weather conditions due to the changes we began putting in place during the second quarter of last year. Our 2015 first quarter operating results in this business reflect the benefits of this repositioning and improved plant availability as well as higher capacity revenues.

For 2015 our committed sales currently are about 70 million megawatt hours essentially having sold everything we anticipated on a retail and forward wholesale basis with over 8 million megawatt hours available for spot wholesale sales over the remainder of the year. For 2015 we are also reducing our generation production estimate from about 79 million megawatt hours down to about 72 million megawatt hours due to the economic and market conditions we experienced during the first quarter and the marketplace outlook for the balance of 2015. If it is more economic for us to purchase power from the market to serve load when needed, we will do so, but we have the benefit of our own generating resources if and when we need to call on them.

Ultimately market conditions will term how much we generate from the fleet and how much we purchase. Essentially, we will source the power to meet our retail load obligations as economically as possible. For 2016 approximately 70% of our projected sales are committed. Based on our results for the first quarter we are reaffirming our 2015 adjusted EBITDA range for the competitive business of $875 million to $950 million as well as our 2016 adjusted EBITDA range of $750 million to $850 million. Consistent with the guidance we provided earlier this year, the corporate consolidated effective tax rate was 38.8% in the first quarter of 2015 compared to 30.3% in the first quarter of 2014.

This change drove an $0.08 per share decrease in the corporate segment compared to last year and reflects the elimination of certain future tax liabilities associated with basis differences in the first quarter of 2014. This year is off to a solid start and we are executing our plans to improve our Company's fundamentals and drive long-term shareholder value through customer focused regulated growth. As Chuck said, we are reaffirming our 2015 guidance range of $2.40 to $2.70 per share and are also providing a second quarter operating earnings range of $0.42 to $0.50 per share. With that, I would like to open the call for your questions.

Thank you. (Operator Instructions). Our first question today is coming from Dan Eggers from Credit Suisse. Please proceed with your question.

Good morning guys.

Morning.

Morning, Dan.

Morning. Just following up on the cost cutting plan, thanks for the additionally detail, but could we maybe dig a little bit more to where you're seeing those buckets of savings maybe between regulated, non-regulated and kind of the scaling of those opportunities as you get further into the plan?

Well, Dan, let me say it this way. I think I said in my remarks that we're going to be focused primarily on the generation business. We're going to look at everything. The reason that the scope is set at about $2.5 billion is because there are certain buckets of expenditures that it would be counter productive to our regulated growth strategy to go and try to address those. For example, our transmission expansion plan. So, we're focused primarily on generation. We're very cognizant of the fact that we don't want to do anything to take the growth strategy in our regulated companies off track.

And if we were to think about what that does to inflation, what is the underlying O&M inflation going to be, your net of these savings? Is that the right way to think about kind of the forward?

I'm not sure I understand your question.

Are these savings going to be net reductions in O&M year-by-year or is there a level of inflation that will eat up some of the savings for thinking about our 2016, 2017, 2018 numbers?

Well, I think that initially this is going to be a step down in our cost structure and like any business over time then there are incremental adjustments that are made as we offer employee wage increases as there are inflationary things that go on in the economy. But, one thing to keep in mind is we have not included staffing in this phase of what we're doing. We will have annually about a thousand employee attritions each year and going forward we expect to make adjustments in the structure of our organization such that those attritions should pretty much offset any inflationary pressures that are on where we're at when this project is done.

Okay. And I guess one other topic with the Supreme Court. Hopefully addressing the 745 case on Monday. Can you just talk about what the process would be from a legal perspective for you guys if the Supreme Court takes the case or if they choose not to take the case?

Leila can.

Okay. So if they choose to take the case, then I would expect to continue to address capacity performance. They've already rejected as premature PGM's attempt to modify the DR process so it would continue as a supply product as it has in the past and wait for some final determination from the Supreme Court substantive determination with regard to demand response. If they decide not to take the case, I can speak to what in theory should happen. In theory what should happen demand response should come out of the capacity auction as a supply product. From our standpoint we believe there is a place for a demand response. We believe that is on the side of state implementation plans and we think going forward that would be a useful product and can still be maintained. With regard to how PJM views it, we know they view that as a very valuable product so I would imagine at a practical level PJM will be seeking to somehow re-include demand response within the capacity auction.

Is it going to be practical, if they don't take the case and they have to go to removal of DR, A, is it practical that it can be reasonably well addressed for this upcoming auction, and then what is your view on whether retroactively prior auctions need to be adjusted?

So, we still have our case out there that had challenged the prior based residual auction. FERC has put that on the back burner, has not addressed that. I would anticipate they're going to need to do something with regard to that, too. So, with regard to that auction any way there's some question as to what would happen and whether it would be appropriate in our view to take demand response out, take out the price oppression effects associated with demand response and not rerun the auction, but just remove the effects of demand response.

Okay. Thank you.

Thank you. Our next question today is coming from Brian Chin from Merrill Lynch. Please proceed with your question.

Hi. Good morning.

Hi Brian.

With the cost cut commentary today does that preclude now the need to issue equity for the foreseeable future? Particularly given some of the FFO to debt metrics that some of the credit agencies are looking at?

Well, here's what I have said on that topic all along. I believe that it's incumbent on us to find a way to fundamentally operate our Company in a way to where we don't have to use equity to strengthen our balance sheet. I think these cost cutting initiatives will get us to a place where we can be successful in not having to do that. Then going forward I think we are where equity should be used is where it's intended to be used in our business, and that is to generate growth in our business. So we may look at equity down the road to use for growth either in additional transmission investment or potentially even investment inside the distribution companies. But I believe we can get ourselves to a position where the cost cutting puts us at the bottom end of the range that he we need to be in from a credit metrics perspective and then these costs over time will continue to improve the balance sheet.

Great. And also, of the cost cuts and cash flow improvements I think you said $100 million of this was expenses and the remainder is cash flow improvements. Can you talk about on the cash flow side how much of that is just timing related as opposed to permanent reductions, or permanent improvements in cash flow, I should say.

I don't think we can even talk about that right now. You know, we just kicked this team off a few weeks back. We're in the early stages of it. I think when we get to this point at the end of the second quarter I think I will be in a good position to tell you more concretely what we have identified and what the ongoing impact on our Company is going to be.

Okay. And then last point and then I will jump back. The cost cuts that you have got, they are embedded in the current EBITDA guidance? I thought I heard you say that, but I just want to confirm.

No, they are not.

They are not. Excellent.

They're targets at this point. Once we know what they are then we'll embed them in our going forward forecast that we give you.

Very good. Thank you very much.

Thank you. Next question today is coming center Steven Fleishman, from Wolfe Research. Please, proceed with your question.

Yes. Hi. Good morning. First, a question, you mention the supplemental testimony you're going to file on Monday I guess, could you just give us a little more color on what areas you might be focusing on with that?

So, hi, Steve. This is Leila. We will be addressing the factors that the commission laid out in the AEP case. While we think our underlying case actually did cover all of those since the mission gave us an opportunity to supplement our testimony, we are availing ourselves of that so just. So, if you think about them over financials, needs, supply diversity, complaint with environmental regulations, jobs, economic development and then kind of going down the list. So we will be supplementing our testimony in all those regards.

Okay. Thanks. Separate question just to clarify something on the equity issuance question before. To the degree that you would look at equity for growth investment would that only be for investment that goes beyond your current capital plan or could it be for investment that's already in your current capital plan?

Well, Steve, I think we need to see where we end up with in initiative first and foremost, and where that leaves us in terms of free cash flow once that's done. But I would say my goal is to use equity for new growth on top of the growth that we've already communicated to you.

Okay. Good. And then last question just in terms of the transmission, my recollection is that you were going to be reserving for some kind of ROE adjustment in transmission and I don't know if there's anything, color you can give on what you're assuming there if there's something in your Q or something on that?

So here's what I would say on that. We have been approved for a forward-looking formula rate at 12.38%. We are doing what we believe is prudent to go forward, but I think we're approaching those negotiations in the settlement process from that perspective and for me to give you anything else I think we're negotiating against ourselves at this point and I'm not prepared to do that so, you know, we'll see where this process unfolds, but FERC approved us at 12.3% and we're going to negotiate from there.

Okay. But you are reserving something?

Small.

Okay. Okay. Thank you.

Thank you. Our next question today is coming from Neal Mitra from Tudor, Pickering, Holt. Please, proceed with your question.

Hi. Good morning.

Hi Neal.

Morning.

First question on JCP&L. Now that you have the rate case revolved obviously it was off of a 2011 test year so you're not getting up to that authorized ROE. How soon could you re-file to try to get the lag reduced between the authorized and the earned?

Hi Neal. Actually from the rate order we are required to file a rate case by April of 2017, but as we always do we continue to look at that and I might expect a filing even sooner than that time frame.

But one of the things we want to do here is we haven't really been able to sit down and talk with the BPU Commissioners for almost three years now and the President and I have talked and we're going to get together and talk about the future of JCP&L together before we get to a point where then we can't talk again. So that's the game plan.

Great. And then, Jim, I wanted to go back to your comments about possibly reducing the amount of tera watt hours that comes out of the fleet in 2015, and I'm not sure if it was 2016 as well. In 2015 would it be a margin benefit just because you're purchasing power at a cheaper cost than generating? Or are the actual tera watt hours coming down for stuff that you haven't hedged and does that also affect 2016 as well?

Neal, what we're looking at is it would be a margin benefit because we would be looking at buying power cheaper than what we would produce it at.

So it would be for the hedged portion I guess in 2015. What about 2016?

Yes.

Have you commented on tera watt hours generation for that?

Yes. We have that broken out in the fact book, Neal. I don't have the exact number right off the top of my head, but yes, we would have it out there but, you know, in 2016 we're going to look at running and dispatching the plants no differently than we are right now. If it's cheaper to buy from the market, that's what we will do.

Great. And then just generally speaking as far as some investment for the super criticals to be CP compliant is there any general color you can give us as to how your fleet is positioned going into the auction in hopefully August?

Well, I think we need to see first where FERC and PJM land in terms of a capacity performance product being in the auction. Then we need to sit down and take a look at how are we going approach that auction from a bidding strategy. Then we need to see what units clear and at what price they clear, and then from there we'll decide what the appropriate investment in our units is to make sure that they're available when they need to be. So there are a lot of un answered questions and there's a lot of competitive implications around how we're going approach this and I'd prefer not to get into the details. But we understand that there is the potential that we may want to do some additional investment in our fleet, but that all depends on where these rules shake out and where the market ultimately clears at.

Perfect. Thank you very much.

Thank you. Our next question today is coming from Julien Dumoulin-Smith, from UBS. Please, proceed with your question.

Good morning.

Hey Julien.

So just following up with a little clarity on New Jersey. Does it necessarily need to be a rate case per se in the median term? Specifically what I'm curious about is there any potential for like a stimulus like program like we have seen in some of the peers in New Jersey versus or in conjunction with a rate case?

Well, as I said, we haven't had a chance to really have meaningful dialogue with the BPU for three years. We're going to go over there and have meaningful dialogue. Once we have that I will be able to answer that question a little better. It's an option that we would obviously be willing to consider if they're willing to consider it.

And then with regard to the disk in Pennsylvania. You've been flirting with the idea for a while. What do you need to see happen there or what's the ambiguity, or ambivalence in pursuing that structure?

Well, I wouldn't say we've been flirting with it. You now we had a major hurdle we had to get through which is the base rate cases for all those companies which we are now through. And now what I have done is I have asked our energy delivery team to look at what investments make sense for customers inside those operating companies. And I've pretty consistently said, I'm going to go invest money where it makes sense for customers. So, until we see exactly company by company what the needs are to drive reliability improvement and improve customer service, I can't answer that. You now I think I have said that we could spend up to about $440 million in Pennsylvania and stay under the 5% cap. I don't see us going anywhere near that number in the first disk filing that we had make, if we make one. But we're putting that business case together right now.

Excellent. And then finally on the GenCO real quickly, in light of the latest round of cost cuts are you still generally targeting a cash flow break even outlook for that Company? Is that kind of the right way to think about it at a high level?

Well, that business is cash flow positive for the next four years without any of these cash flow improvements so anything that we accomplish is going to make it more cash flow positive and it's going to improve FirstEnergy's overall cash flow and that's what we're trying to accomplish so we're already cash flow positive for that business for the next four years.

Great. Excellent. Thank you.

Thank you. Our next question today is coming from Paul Patterson, from Glenrock Associates. Please, proceed with your question.

Good morning.

Morning, Paul.

Just going over a few of these questions I'm afraid I was a little bit not completely clear on. When I look at the fact book and we talked about it, I think it was Neal's question on the generation output, I don't see any significant change post 2015 in terms of you guys' expectation and I just want to make sure I understood this correctly. Do you guys, because of what is what's happened with power prices and the (inaudible) see any change in your what your output might be? I just want to just make sure I understand.

Paul, this is Donny. Yes. For 2016 with the forwards that are out there we're still projecting no change to what we have shown in previous fact books. The fact of the matter is that at today's forwards we're kind of right on the edge and so almost literally a dollar change in the forwards would move whether we dispatch a unit or we don't dispatch a unit. But for now what we're seeing in 2016 is that our units will run as we have forecasted previously.

Okay. Great. Thanks for clarity. Then also on I think Dan's question on (inaudible) FERC. Leila, you said that if the Supreme Court that did take up the auction I think you said, or take up the case, excuse me, that you wouldn't seek to rerun the auction but you would want to take out the effects. Could you elaborate a little bit more about it? Are you saying that you just have the auction re-priced or what do you actually mean by that?

No. I think maybe you miss understood what I said. What FERC has done, PJM came to FERC and asked to consider DR on the demand side of the equation and FERC told them they were premature in that so if the Supreme Court takes up the case, the chance exists that demand response might still be under FERC jurisdiction, and I think that's what FERC was looking at. So right now the way I think it would play out is demand response would be in the BRA auction when it's held presumably in the middle of August and would be a supply side item. As it has been the in the past.

Okay. But if the Supreme Court did not take it out, would you seek to have the previous auctions, I think you suggested, that the previous auctions you would want to (multiple speakers)

Correct.

What do you mean by not having the auctions re-run but having the effect taken out, I think is what I understood.

Correct. So flashing back to last year when we held the BRA and we filed the complaint with FERC, what we suggested was if demand response is not under FERC jurisdiction then what the remedy should be is just to remove demand response from the supply side and then you can still stack up from how the auction was. What would have happened had demand response not been taken but other generators would have been taken. So you take out the price oppression effect but nobody has to re-bid everything back into the auction. (multiple speakers)

Okay I see. Okay. Thanks so much for that. And then on JCP&L there is this review that's going on that I think they're trying to do some audit or something, which is a little unusual since you just had your proceeding. But they, themselves, are seeking to review you guys. Could you talk about that and how that relates to the potential for, could you just address that I guess and what you think about that in this whole idea about the lag and everything else that you talked about?

Well, first of all, I would say this. We're not afraid of any audit of JCP&L's operations. I am confident that when they do this review they're going to see a JCP&L that is much different than the JCP&L they saw the last time that they did a review. The reason for it is as a result of the 2011 and 2012 storms. There were reliability issues that kind of crept into the rate case and there was no adequate mechanism within the rate case to deal with the reliability issues so coming out of the rate case this is a way to kind of put those reliability issues behind us and position us, as I said, where we can now work with the BPU to move forward together.

Great. Thanks so much.

Thank you. Our next question today is coming from Charles Fishman, from Morningstar. Please, proceed with your question.

Good morning. You had a great quarter with respect to transmission. I just wonder appreciating that you don't want to negotiate with yourself during the settlement proceedings but I believe this was the first quarter you got forward rate making mechanism at TrAIL Co. Can you separate that out, the $0.09? How much was due to the forward mechanism and how much was due to the fact that you have been very busy with CapEx the past year?

First of all it was ATSI that we filed for, not TrAIL.

Okay.

And as a result of the filing what you're essentially seeing is the investments that we made in 2014 were made in kind of the old formula rate. So for the first quarter this year you're seeing kind of a compound impact of everything that we invested in 2014 because the rate went into effect, as well as the first quarter investments that we have made. So, in those overall results the difference between a 12.38% return and any other subsequent return that we might end up at is minimal. And that's why we say we've reserved a small amount, but we're moving forward with a 12.38% return until somebody tells us it's a different return. And I believe there's a very strong case to be made that if there is a different return it should be different going forward from the point where there's a settlement, not, you know, reverse.

Okay. So the settlement negotiations are really over the ROE, not over the forward rate making mechanism, correct?

This is Leila. We really can't comment on what's being discussed in the settlement, but I think given the position of ROE in the grand scheme of things you can derive your own conclusions with regard to that.

Okay. Thank you.

Thank you. Our your next question is from the line of is come from Ashar please proceed with your question.

First of all, great results. And my questions have been answered. Thank you so much.

Thank you. Our your next question is from Michael Lapides from Goldman Sachs. Please proceed with your question.

Hey, guys. Congrats on a good quarter. Real quick, and this one may be more for Jim. Just looking at the short-term debt balances seeing that those went up a little bit just what's your plan in terms of whether you will maintain that short-term debt balance outstanding for a good while or whether you have the capability to pay it down or will you think about either terming it out or doing something else with it to reduce long-term interest rate exposure?

We got to wait to see where we come out on these initiatives that Chuck talked about, Michael. We have some significant opportunity in the cash flow improvement project that Chuck talked about. And then a couple of the other big items that we're still looking at the capacity performance and the PPA. We don't have any plans right now to term any of that debt out. We will continue to look at it. The first quarter's a little bit unusual from cash flow output.

We generally pre-pay our Pennsylvania gross receipts tax. That's about $170 some million. We had a pension contribution that we made in the first quarter. Ohio property taxes are due in the first and third quarter and generally our benefit plan pads are in the first quarter. So it's a bits of an abnormal. I would expect that over the rest of the year we would not see that balance to grow. In fact, we may reduce that somewhat. But we will continue to look at whether it makes sense to term any of it out. I would prefer, as time goes on, to push that further down into the business units, have the debt closer to the asset, but I think we've got to wait to see where we come out on some of these initiatives before we make that final decision.

Got it. Thank you, Jim. Much appreciated.

Thank you. Our next question is from the line of Hugh Wynne, from Bernstein Research. Please proceed with your question.

Hi. I just wanted to congratulate you and encourage you on the effort to improve the quality of earnings. And I wanted to ask a question regarding that. One of the distinct aspects of your operating earnings presentation as I understand it, and correct me if I'm wrong, is that unlike your GAAP earnings where the difference between expected returns on pension assets and realized returns on pension assets is recognized every year in the fourth quarter, and operating earnings there's actually no recognition of that difference. And I estimate that over the last five years that difference of expected returns over actual returns on pension assets has been something like $570 million, which works out to an average of about $115 million a year, or $0.27 a share. My question then is are you thinking of ways in which you could perhaps reflect more accurately in operating earnings the outcome of your pension investments?

Hugh, we made that decision a number of years ago to record any changes in actuarial assumptions on a mark-to-market basis. In our ongoing operating results we have all of the service costs in there and then just any changes in the actuarial assumptions and the biggest piece of that is generally the change in the discount rate which has fallen over the what few years. So, we have no intention of changing the way we report our pension and our operating earnings going forward, but we fully break that out and let you know what the discount rate is and the actual return on the assets.

Got it. Thanks.

Thank you. Our your next question today is coming from Paul Fremont, from Jefferies. Please, proceed with your question.

Thank you very much. Really, two things. One, can you give us any type of update on potential discussions that you're having in Ohio? I think at one point you had mentioned that some other parties had expressed an interest in talking to you subsequent to the AEP decision.

Well, I would say this. We're always in discussions with the parties that are intervening and we're not in discussions with the commission because we can't be and when we have something to tell you, we'll tell you.

And then I guess the other question is half the $2.6 billion I think represented fuel which I think is more unique to the generation side, but the other half looked like it could be potential savings that would apply to other segments within the Company. You sort of ruled out transmission, but any possible application of that saving to the distribution side?

Well, what I ruled out is anything that would have a negative impact on our regulated growth strategy. So we just had rate cases in a number of our operations. It it would be counter productive there if we're looking at going forward and making additional investments inside those utilities. What I ruled out is, I used transmission as an example, but what I have a ruled out is anything that impacts our regulated growth strategy.

Thank you.

Thank you. Our next question is from the line of Anthony Cardell, from Jeffries. Please, proceed with your question.

Hi. All my questions have been answered. Thanks.

Thank you. Our next question today is coming from Stephen Byrd, from Morgan. Please, proceed with your question.

Good morning.

Hi Stephen.

Good morning.

In your initial remarks you had mentioned one of the contributors to 1Q performance was I think it was more rigorous economic dispatch of the generation units. I was wondering if you could just expand in terms of how you approached it this year versus in prior periods?

Well, why don't I let Donny take it but as I have told you, our goal is to run the competitive business overall a little more conservatively so that we can have predictable results and that's what we're trying to achieve and obviously what I talked about is the fact that last year there was a polar vortex. This year in February there was what they termed a Siberian express which was actually more severe weather and a higher PGM peak load. And I think that we were able to capitalize on some of that weather improvement that we get on the utility side by doing what I said, and that is operating our generating business much more conservatively and part of that is we're not going to dispatch units into a price that they don't make money if we can avoid doing that. So, Donny, do you want to fill in any details?

Yes. Stephen, I would just say we've had a long history of this kind of thing. If you recall back in 2009 time frame and the market first collapsed, we took our lake plants offline, we took that work force out of lake plants and moved them into the regulated side of the business. Summer of 2012 we took the Sammis plant offline, took it offline for about three or four months and then ultimately brought it back on line. What we have now that's different than what we've had in the past is a lot more free board. When you have that open position into the spot market you're able to take advantage of the market much more readily than what we've had in the past because we have a cushion there from a risk perspective. So when you look back at this previous quarter, we had our Mansfield plant completely offline for about a straight week when the price was below our marginal cost.

Okay. Understood. That makes sense. And then just touching on performance during the winter. It sounds like this winter you all had much better operational performance. We have talked a little bit in the past about this but just curious, how can you, can you talk about the changes you've had year-over-year and how you physically manage the fleet for weather risk and how that positions you going forward?

Well, the biggest difference between January of 2014 and this year was we had our generator step-up transformer failure at Beaver Valley 1. It was not a weather-related event even though the temperature outside might have been 17 below zero. The temperature inside that transformer is around 75 to 90 degrees C, so it was a random failure that just happened to occur at the worst time that it could possibly occur. So that was the biggest impact on 2014. Beyond that, we took some steps to harden, if you will, some of the equipment that is outdoors and subject to weather at our power plants that could lead to a disruption in units performance. But there wasn't a whole lot of significant work and expenditures necessary to do that. And I will just tell you that the team work between our commodity group and our generation fleet was exceptional this winter and that also led to the type of results that we were able to accomplish.

Thank you very much.

Okay. Well, I think that was the last question so we want to thank you all for your support. Obviously, I think we had a pretty good quarter. It was influenced by the weather and I'm not going to take credit for the weather because we've got July and August coming and if it goes the other way I'm not going to take blame for the weather either. But it was a good start to the year. If you dig down below that our operational performance was right on schedule with what we're trying to accomplish and I know one quarter doesn't make a trend, but you have to start with one before you can get to 10 or 12. So that's our game plan and we thank you all for your support.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.