第一能源 (FE) 2015 Q2 法說會逐字稿

Greetings, and welcome to the FirstEnergy Corporation second quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Meghan Beringer, Director of Investor Relations for FirstEnergy. Thank you, you may begin.

Thanks, Brenda, and good morning. Welcome to the FirstEnergy's second-quarter earnings 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 to differ materially from those indicated by such statements can be found on the Investors section of our website under the earnings information link, and in our SEC filings.

We will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures 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. 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 Strah, Vice President and Treasurer, Don Moul, Vice President, Commodity Operations, and Irene Prezelj, Vice President, Investor Relations. Now I will turn the call over to Chuck Jones.

Thanks, Meghan. Good morning everyone. Thank you for joining us. I am pleased to have this opportunity to share an update on what has been a very busy and productive period for FirstEnergy. We are continuing to make steady progress on our strategic initiatives. We are achieving closure on several of the industry issues that impact our Company, and we reported very strong financial results for the second quarter. Our efforts to position FirstEnergy for a stable, predictable and customer service driven growth remain on track, and I'm optimistic about our future. During my remarks today, I will review a number of recent developments and give you a sense of what we expect for the rest of the year. Following my comments and Jim's review of our financial and operating results, we will have plenty of time for your questions.

Our operating earnings for the second quarter were $0.53 per share, which is $0.03 above the top of the range we provided in May. These results were higher -- these results were driven by higher earnings in our transmission business, and the benefits of our more conservative strategy in our competitive business.

We continue to make solid progress on our Energizing the Future transmission initiative, which as you know is expected to be the primary driver of our growth over the next several years. During the second quarter, we completed the projects designed to support service reliability following the plant deactivations in northern Ohio, and we continue our work to upgrade and strengthen the grid in the ATSI region and support midstream gas operations. We remain on pace to invest $970 million in our transmission business during 2015, with about 60% of this investment already complete. This year, we have also put into place the framework to ensure more timely recovery for our transmission investments. In January we moved to a forward-looking formula rate structure for ATSI, and on July 20, we filed with FERC a settlement agreement that maintains ATSI's ROE at 12.38% for the first six months of this year. Under the settlement, which remains subject to FERC approval, the rate adjusts to 11.06% for the second half of this year, and then to 10.38% beginning January 1, 2016, until at least January 1, 2018. The average ROE for the three-year period would be [10.83]%. We are pleased to reach this settlement as it reflects the current transmission ROE environment, and allows us to move forward with our Energizing the Future Transmission Investment Plan for customers, while ensuring timely recovery for the Company. We expect approval from FERC later this year.

In June, we filed a request for authorization to transfer transmission assets owned by Met-ed, Penelec and JCP&L into a new transmission affiliate called Mid-Atlantic Interstate Transmission or MAIT. These assets represent approximately $900 million in rate base as of the end of 2014. If approved by FERC, the Pennsylvania Public Utility Commission and the New Jersey Board of Public Utilities, MAIT it will operate similarly to our two existing transmission subsidiaries, ATSI and TrAILCo. We expect this structure to facilitate investments that can improve service reliability for customers of our eastern utility companies, similar to what we are doing for customers connected to our ANSI ATSI transmission system. We are seeking approval from FERC in six months, and from the state commissions by mid 2016. Prior to closing the transaction, MAIT will file for new transmission rates with FERC.

In May, I outlined three key initiatives that will shape our Company going forward. These are the cash flow improvement project, PJM, capacity market reforms, and our Ohio ESP. Let's start with a result of our cash flow improvement project. I'm pleased to report that we expect this project to result in cash flow improvements of $58 million in 2015, $155 million in 2016, and $240 million in 2017, exceeding the original targets for all three years. We launched this project in April with the goal of capturing both immediate and long-term savings that are meaningful and sustainable. We have completed a thorough analysis of savings and process improvements that do not compromise our ability to serve the needs of our organization, our customers and our employees, and we are now moving forward to implement these plans. These improvements come primarily from our competitive and corporate functions. The largest categories include reducing expenses and capital at our competitive fleet, particularly at our sub critical fossil units, reducing fossil fuel and fuel-related commodity expenses, and taking advantage of attrition across the Company, and implemented a selective hiring program.

There also nearly 100 smaller items that collectively make a strong impact. About 65% of these savings are expected from operating expenses, and 35% are from capital and nuclear fuel improvements over the three-year period. On page 170 of our fact book, which was posted on our website last evening, we include more details on the cash flow initiative. We've already begun the implementation process, in fact, the majority of the fuel savings that we identified have already been locked in, and the new contract pricing will begin in September. We've also established a project management office to ensure we capture these savings, and are fully committed to successfully executing this plan, and establishing a new foundation for FirstEnergy going forward. We believe it will result in a stronger and more flexible Company with an improved balance sheet over time.

Turning to capacity market reforms, during the quarter FERC approved PGM's new capacity performance rules, and as you know FERC issued an order last week allowing demand response and energy efficiency resources into the transitional auctions. Importantly, the base residual auction remains on track, and it is scheduled to begin August 10. The 2016/2017 and 2017/2018 transitional auctions were delayed slightly, and are now scheduled to begin on August 26 and September 3, respectively.

Before I move from generation, let's quickly touch on the Supreme Court decision regarding MATS. While the EPA regulations remain in effect pending further judicial proceedings before the DC Circuit Court, I want to be clear that FirstEnergy is not contemplating reopening any of the units representing 4,769 megawatts of generation that were closed due to cost of compliance with the MATS regulations. For our remaining fleet, we have already spent a significant portion of the $370 million in capital expenditures for equipment upgrades that were required under MATS, and many projects are complete or underway. In our competitive generation fleet, we identified a total cost of $178 million to comply with the regulations, of which $62 million had been spent through June 30 of this year. At our regulated fleet, the cost estimate was $192 million, with $105 million of that spent through June 30.

I will also mention that we are moving forward with all aspects of the construction of the new dewatering facility for our 2400 megawatt Bruce Mansfield plant in Pennsylvania. While the plant is still pressured by current market conditions, we believe moving forward with construction is prudent to ensure that these megawatts remain available to serve customers in 2017, after our disposal rights at Little Blue Run expire. As we have previously mentioned, all costs associated with this project are in our current capital plan.

Finally, let's move to Ohio and our electric security plan. Based on the current procedural schedules, staff testimony is due August 14, with hearings to begin at the end of the month. As you would expect, we remain very engaged in this process.

We filed supplemental testimony in early May to further emphasize the factors that the Ohio Commission outlined in the AEP and Duke cases. It is telling that the public utilities that serve the majority of customers in the state agree conceptually, on an appropriate transition plan toward a future that ensures safe, reliable, clean and affordable power for all Ohio customers, from industrial facilities to homeowners. Given the plans benefits, including the economic development support, we believe our filing meets the criteria outlined by the Commission, and we remain optimistic as this plan will result in sound state energy policy for our customers.

We've had a solid first half. Since the start of the year, we have made tremendous progress towards our goals of investing in customer-focused growth, supporting sound energy policy, and strengthening our Company from within, and we know there is to work to be done to position FirstEnergy for the future. At this point, we are reaffirming our 2015 operating earnings guidance range of $2.40 a share to $2.70 a share, with all three of our operating segments trending favorably versus their midpoints. We are comfortable guiding to the top of this range. We expect to refine guidance on the third quarter call, once we have seen the full effects of the summer weather. Collectively, the cash flow improvement initiative, upcoming capacity auction results, and Ohio ESP decision will drive the near-term financial strategy of our Company, and give us a much clearer view of the next three years, including earnings and cash flow and a determination on additional equity, if any, to drive growth in our regulated businesses. In addition, we have already begun our robust annual planning process, which includes updating projections for all of our utilities, especially now that we have the three major rate cases behind us. This effort will help us further refine our distribution utility earnings profile going forward.

Many of you have asked about the status of our Analyst meeting. At this time, we still intend to hold it after the outcome of the Ohio ESP, which may push the meeting into early 2016. We look forward to providing you a comprehensive view of our future planning at that time. Now I'll turn the call over to Jim for a brief review of our second-quarter financial results.

Thanks, Chuck, and good morning, everyone. My prepared remarks will focus on the major drivers and events of the quarter. As you know, more details are available in the consolidated report that was posted on our website yesterday evening. And as always, we welcome your questions, either in the Q&A or following the call.

Today we reported strong second-quarter 2015 operating earnings of $0.53 per share, which compares to $0.49 per share last year. On a GAAP basis, basic earnings were $0.44 per share for the second quarter of 2015. GAAP earnings were $0.16 per basic share during the same period last year. As Chuck mentioned, our operating earnings were above our targeted range for the quarter.

Let's look at the results from each of our segments starting with the distribution business. Residential sales decreased 7/10% overall, compared to the second quarter of 2014, while commercial sales increased 1%. Adjusting for weather, residential deliveries, were down 2.4%, and commercial sales were flat. We are examining the residential usage trend which has been down for the last four quarters on a weather adjusted basis. We believe this is attributable to energy efficiency, as average customer usage has also declined quarter over quarter.

In the industrial sector, sales decreased 1.1% in the quarter, ending a seven quarter run of increased demand from the customer class, primarily due to the lower usage from the steel industry. The current rate of shale growth continues to be impacted by soft natural gas prices. While we still see support for more than 1,000 megawatts of new load from midstream activity through 2019, our forecast reflect greater confidence in the 2015 to 2016 projects, which represent about half of that load growth.

Turning to our transmission business, second-quarter operating earnings increased $0.06 to $0.21 per share, as a result of revenue increases from a higher rate base at ATSI, and the forward-looking rate structure that began in January. In our competitive business, operating earnings increased $0.01 per share, compared to the same period last year, reflecting higher commodity margin associated with higher capacity revenues, a modest increase in wholesale sales and lower contact sales. Additionally, operating costs decreased year-over-year largely due to improved plant performance.

As we said last quarter, we have essentially sold everything we anticipated for 2015 on a retail and forward wholesale basis, with a reserve of 5 million-megawatt hours available for spot wholesale sales through the end of the year. For 2016, about 70% of our expected generation resources are committed, and we are currently about 40% committed for 2017. Based on our results for the first half of the year and the projected savings from the cash flow improvement initiative, we are reaffirming our 2015 adjusted EBITDA range for the competitive business of $875 million to $950 million, and increasing our 2016 adjusted EBITDA range to $825 million to $925 million from $750 million to $850 million.

It was another solid quarter for our Company, and this is shaping up to be a good year. As Chuck said, we are reaffirming our operating earnings guidance, and the trends we see so far this year make us confident at the top end of that range at this point. We are committed to achieving the cash savings we have identified into building long-term shareholder value through our customer-focused regulated growth strategy. Now with that, I'd like to open the call for your questions.

(Operator Instructions)

Our first question comes from the line of Dan Eggers with Credit Suisse.

Hey, good morning guys. Chuck, thanks for the additional detail on the cash flow improvement slides. I guess, in the sense of being greedy, two questions. One, what do you see for opportunities going forward, and can those numbers grow as you get further into the process of evaluation? And then two, can you talk a little bit how you really get such big fuel savings out of suppliers, who seem to be in pretty financial dire straits at this point?

Well, I tell you what I will take the first question, and then I'll hand the second part of it off for Don Moel to answer. On the first one, I do think there are some opportunities for us to add to this over time. Particularly in the supply chain area, we set a 12 week time frame to complete this study. We can operate at that speed, but our suppliers don't all necessarily operate at that speed. So we've got a number of items in the queue that we are working on to try to get across the finish line. So I think there is some opportunity to improve these over time. And I'll let Don tackle your fuel question.

Yes, thanks, Chuck. So when you take a look at the [CFIP] savings as you noted Dan, one of the most significant savings in the initiative comes from the reduction in the fossil fuel costs. That total savings is about $151 million. And it kind of breaks out as follows, about half or $75 million of the savings is really a result of working with our coal suppliers to get reduced rates; and then, we got about $50 million associated with our refined coal process, where we have partnered with several third-parties to produce a coal that reduces emissions; we have a contractual relationship, where we are paid for every ton of coal that is treated, and a third-party receives a tax credit under Section 45 of the tax code.

These contracts are now place at Sammis, Mansfield through 2021, and we are in the final steps of negotiating for Pleasants. The balance, which is about $25 million is driven from several smaller items including reagent and waste disposal cost, and as Chuck said, these are already under contract. So that is part of the breakdown of the savings, and clearly the coal suppliers are in tight market times, as well as we are.

We found opportunities to build on our relationships. We've got good relationships with our coal suppliers and our transportation suppliers. We meet with them twice a year to work through this market challenges, and try to find ways that we can partner in a win-win kind of approach. So we've been successful so far. We look forward to working with them in the future.

Okay. (Multiple speakers) Go ahead.

I would just follow on a second there, because I know I'm going to get this question later. The savings we were able to achieve in the fuel supply, particularly related it to the Bruce Mansfield plant, were a big factor in our decision to move forward with the dewatering facility; makes that plant more competitive starting September 1.

Okay, got it. I guess, can we turn to the Ohio PPA structure, it keeps getting pushed out from a time perspective. Should we read any thing into -- maybe some change in tone at the governor level or the Commission level, as they're interested in doing this? And then do you see any risk to maybe interest changing, once EPA comes to the carbon rules, or once RPM get out there?

I will let Leila take it, and I may follow.

Thanks, Chuck. Hi Dan. I think the delay in the hearing was in response to the Commission's desire to get additional data points, with regard to what's happening with the EPA. But I think more precisely with what is happening with the capacity performance. I don't think that should be the be-all end-all, I think those are data points, but I also think they are mindful with the fact that our current ESP ends the middle of next year. So there's not a lot of additional delays that could be tolerated within the schedule we need to meet.

So I think we are in a good space right now regard to the timing of it, with hearings starting August 31. One thing I'd like to point out that, it was after the last call, do we continue to be in negotiations? Since our last call, we were able to add IU as a non-opposing party and Kroger as a signed party. So I think what was presented to the commission is a very robust settlement. So I'm still very hopeful that we will be up to move forward in a very positive way. And as always, we continue to try and bring additional parties on board.

So to your question on how does it tie into the clean power plant and other things that are going on, I don't think we have time to wait to see how all of those shake out. There is a sense of urgency here I think around these two facilities in particular, that we've got to get a decision made about them. So obviously, we're anxious to keep it moving forward.

And then, just to clarify the timeline is, the hearings are August 31. Can you just walk through, Leila, maybe the steps from there, to where finding a resolution should play out, if it goes the fully litigated route without a settlement?

So at this point, I would like to say we would get it done by the end of the year. But I'm thinking it might slip into the very first part of next year, so early 2016 for final decision.

Okay. Thank you guys.

Neel Mitra with Tudor, Pickering, Holt.

Hey, good morning. The transmission business seems to be doing well, and I think in the past you've mentioned maybe about $1 billion is the maximum you can spend a year. Is that number still right, or could you deploy additional capital beyond that $1 billion if the process goes well, and the Pennsylvania utilities are included in the transco?

Well, I think there are several factors. We have communicated our plan for the next several years, and they amount to about $1 billion a year. MAIT will provide additional opportunities if we are successful in getting it done.

Our transmission infrastructure has aged, and we have talked about a queue of projects that could potentially go on for a long time at the rate of $1 billion a year. So I think at that point in time, we would look at it. But I think a determining factor is the ability to resource additional construction. There is a shortage of transmission alignment around our country, and that would be a factor in terms of expanding it to any significant amount, I think.

Got it. And then the second question on Davis- Besse and Sammis, obviously, you need both the capacity auction, and the PPA for the plants to be successful. How do you philosophically think about the strategy around bidding in the PJM without a PPA resolution in hand?

Our attack is to bid those units as competitive units. That's what they are today. And I would just correct one thing you said, I don't think we need both. I think we need the PPAs. If we are successful there, what happens in the capacity auctions, even though they are bid as competitive units, that value will flow to customers once the PPA is approved.

Okay, got it. Thank you, very much.

Gregg Orrill with Barclays.

Yes, good morning, thank you. I was wondering if you could comment on the appeals to the Supreme Court of Ohio of the AEP, PPA proposal, and whether that is relevant to your case at all? And if you care to comment on whether you think the Supreme Court will take the case?

Gregg, this is Leila. I think right now, that those appeals are premature. There is still [APS] for a hearing associated with that case. And in Ohio I don't see how you get the Supreme Court to take those up when APS for a rehearing are pending. So I really expect those cases, those appeals to be dismissed. It doesn't mean they can't refile them at a later date, but again I think they are premature. So I don't think they're going to have any effect on our case.

With regard, I read some conjecture if they went forward somehow things would be stayed. In Ohio, if a case is going before the Ohio Supreme Court, the decision goes forward. The Commission decision goes forward and is not stayed, unless a specific or statutory provision is met. And under that provision, the party that is requesting the stay, needs to provide and post a bond. So that is a very high hurdle to fill within the context of these types of cases (multiple speakers). So again, bottom line no effect.

Jonathan Arnold with Deutsche Bank.

Good morning, guys. I have a quick question on the transmission. Again, you booked -- you are up, I guess, $0.11 in the first half of the year. Is there anything in those numbers for the settlement, like have you taken some kind of a charge against the lower ROE this quarter, or is that all to come in H2 when the thing is finalized?

Well, there wasn't a lower ROE this quarter. We got 12.38% in place for the first six months of 2015, which was a partial contributor to the better performance in the transmission segment.

Well, I was just curious, Chuck, whether you might've had to recognize the lower return that will come in the second half of the year ahead of time, but it sounds like no.

No, we won't, Jonathan. We will recognize those during the periods that they occur.

So the moving parts, as we think about the second half, the transmission is higher rate base, having the forward-looking test year, for the second half of the year, and tempered somewhat by ROE?

Yes, I would say Jonathan for the second half of the year, you won't see the robust growth that we saw in the first quarter. We were up $0.11 year-over-year. For the second quarter, or for the second half of the year, you're going to have a much higher rate base, that you are going to compare to in 2015 compared to 2014. In the first half of 2014, that rate based was based on December 2012 rate base, and that carried through for the first five months, and that was $683 million.

When I look at the comparison to the second half of 2014, that rate base is going to be about $922 million, compared to the $1.8 billion. And you are right, the ROE that was used for the second half of last year was $12.38%, and we will recognize 11.06% the second half of 2015. With that said, I would expect that transmission will trend to the upper end of the range, as we said most of our segments are.

Okay. But still the math will more or less get you there, when you add all those parts together?

That's right.

Okay, thank you.

So I just want to add we are very happy with this settlement. We wouldn't have settled it if we weren't. If you think about what we're doing, $500 million of investment in our transmission business, the difference between 10.38% and 12.38% adds to maybe $10 million, maybe $0.015 a share overall. But as we've talked earlier, the forward-looking rate returns cash and earnings back to the business faster and more timely, given the way we are investing in smaller projects that get done quickly.

We concur, Chuck, and we think getting the clarity on ROE is a big help, too. So I just wanted to try and understand the math of bridging the second half.

Okay.

Steve Fleishman with Wolfe Research.

Hi, good morning.

Hi, Steve

Hi, Chuck. Two questions, first is there any schedule that has been set so far on the filing on the MAIT approvals, I guess particularly in the states of Pennsylvania and New Jersey?

So right now interventions were due by July 10, and right now I don't see any further procedural schedules set with regard to that. Although we would expect a decision by December 15.

And that's in which state?

(multiple speakers) I'm sorry?

Which state (multiple speakers).

So that's with respect to FERC.

At FERC, okay (multiple speakers).

To Pennsylvania, interventions August 3, prehearing conferences in sometime August or September date, and then a decision mid- 2016. And with respect to New Jersey, there are no deadline or interventions, and we would expect in order again with regard to that by mid 2016. So, no specific hearing dates.

Okay. And then, is there precedents in Pennsylvania and New Jersey for others that have been able to get -- existing transmission kind of separated out?

Yes, part of our ATSI assets are in Pennsylvania, and I believe there are others, although they are not top of mind right now (multiples speakers).

Penn Power operating company is part of ATSI.

Great. And then, just the clarification on the comment on equity. I think you again said, that you would only consider equity, to the degree that there would be additional growth beyond your current capital plan, is that correct?

So what I said in my remarks is once we have -- we've got the cash flow improvement done, once we have the results of capacity performance, and once we know where we are at with the ESP, then we will look at whether there is an application for equity to stimulate growth, both in transmission and distribution, if any.

Now I have said all along, I do not want to have to use equity to repair our credit metrics and strengthen the balance sheet. That is why we implemented the CFIP project, and I think we made substantial progress there, as that starts to flow through to strengthening of our balance sheet, strengthening of our cash flow, and strengthening our FFO because about two-thirds of it is O&M. And then we will see where the other two land, and then we will go from there. And when we have analyst meeting hopefully early next year, then we will tell you where we are at with that, a little more definitively.

Okay, great. Thank you.

Shahr Pourreza with Guggenheim.

Just one quick question on the delay of the ESP, Obviously, could we get a little bit of a sense on the status of the upcoming POLR auctions. And sort of if there is a potential impact on your hedging profile, and obviously you have been lowering your weather sensitive hedges, but I'm kind of curious on how we should think about that?

So let me answer the first piece of that with regard to the schedule. I do believe that the delay in the schedule was in part a desire on the part of the new administration under the new chair, Andre Carter Porter, to get additional data points before having to make a decision. I think those, even though the transitional auctions have been pushed back, by the time we complete hearings, those data points will also be known. So I don't anticipate further delays. Again because, if for no other reason we need to secure additional POLR auctions for flow to deliver it to be delivered by mid next year. So I think we are at that point where hopefully we are actually going to go forward at the end of August with hearings. And I'm going to turn it over to Don with regard to the hedging part of the question.

As similar with other market participants we're going to have to adjust based on that POLR auction schedule is. Obviously, we try to build our plan to ratably hedge through the year. If we need to, we will adjust to other channels including the wholesale channel, if we have to sell-forward to lock in some of that volume, and eliminate price risk from our portfolio.

Excellent, that was it. Thank you, very much.

Julien Dumoulin-Smith with UBS.

So first question here, in terms of the timing of -- you obviously talked about an analyst day early next year, but [EEI] this year or the back half of the year in terms of the capital budgeting process, and updating us on the outlook for the T&D wires, if you will, side of the house. Holistically would you expect to give us an update on the CapEx? And perhaps in tandem with that I suppose, balance sheet and cash flow considerations coming out of that?

I think at EEI in November we will give you what we have typically given you at EEI, which is our best look at the future across all of those, yes. We are not holding anything back there, but I don't think we can talk about the long-term plan, beyond the next couple of years until we have the answer to those other two questions that I talked about.

Got it. And when you talk about long-term plan, let me just be a little bit a clear if you can, or perhaps preview the analyst day a little bit, are we alluding to the future of the generation business here, and how that fits within the context of your business? Or is the long-term plan more strictly defined within where the long-term trajectory of spend is, in the context of your wires business? I can -- sorry (laughter)

Julien, since I took over this job January 1, I bet I've had the question 500 times, what is the long-term growth strategy, what's the long-term vision. And I think I've answered it the same way, 500 times, is I would say once that was a get into these short-term issues out of the way. So I think it applies to all of that.

Got it. Excellent. Well thank you, very much.

Brian Chin with Bank of America.

Hi, thanks and good morning.

Hi, Brian.

When FERC made the decision about demand response in the transitional auctions, I was wondering to what extent does that affect your thoughts, with regards to the Company's ability to not had to issue equity with regards to the competitiveness, if at all?

I don't think I've sat here ever, thinking about issuing equity for the competitive business, and I think once the results of the cash flow improvement process, which a substantial part were -- was a result of the competitive business stepping up, their particular credit metrics are going to look very strong. It's going to make a big impact on that part of the Company, and it makes an impact on the overall FirstEnergy credit metrics too, but a substantial impact inside the competitive business. So I think we're going to be fine there for the foreseeable future.

We already had that business in a position where it was cash flow positive for the next four years. This makes it substantially more cash flow positive, which was the second factor in the decision to go forward with the Mansfield dewatering. All the CapEx for that project was already in the four-year plan, and already in a plan that was cash flow positive. But we've now got some margin there, and as I've said all along, the game plan with that business is to keep it cash flow positive, and take that positive cash flow and eventually use it to start paying back the holding company for some of the loans that we made to that business a few years ago. So that's the long-term plan there.

Got it. Thank you, very much.

Paul Patterson of Glenrock Associates.

Good morning. First question. So you guys have been -- Chuck, you have been making the rounds of the editorial boards, and there have been some interesting quotes and what have you. And I know that sometimes when you being reported on, it may not come out exactly as you intended. But I just wondered if you could elaborate a little bit more on this -- your comments about re-regulation, trying to save the company, statements like that? And just how that fits in with this ESP proposal that you have, the PPA proposal, and just sort of comment a little bit more on that?

So, let's first talk a little bit about how a newspaper is run. We went and met with the editorial board, and we had what I thought was a good conversation, over an hour and 50 minutes, but then it gets boiled down into an article. Once that article is written, then there is a headline writer, who goes and writes a headline, to try to draw attention to that article. The headline that was written for that article was completely inaccurate, as to anything we discussed during that interview.

In the interview, I was asked the specific question of, are we in any way working to get the legislature of the state to consider re-regulating? And my answer was no. In the context of the discussion about the PPAs, here is my view. We are talking about trying to find ways to preserve major generating assets that have plenty of useful life left in them, and keep them from closing prematurely. Exelon is looking at doing that in Illinois and New York. Ohio utilities are looking at it doing that in Ohio. You don't ever hear any conversation about needing to do that in states that are regulated.

Regulated states have plenty of generation. They have integrated resource plans, and if they need more generation, they either buy or build it, so they are assured, they have adequate generation to serve the customers. So these PPAs, I see as a bridge to keep these plants alive, long enough to allow whatever happens. If our state wants to look at that issue over time, great. But it's not going to happen fast enough for these two plants.

If we are ultimately able to make significant corrections in the market, to make sure they provide for the long-term security of base load generating facilities, great. But I don't think we have time to wait on that either. And yesterday, the Senate Energy Committee put forth a bill that talks about asking the markets to kind of come up with a process to make sure they ensure diversity of both fuel and types of capacity, generating capacity across the markets. We don't have time to wait on that either. These plants are at risk today, and we need to get a decision made, as to whether we're going to look at ways to protect them, so we let all of those debates and legislation in Washington, DC and everything else play out.

Okay, I appreciate the clarity. I just thought I'd hear it straight from you. So then the second question I have for you, is the fuel savings that you guys have been talking about. How sustainable is that, and do you see potential, other opportunities, or just -- in other words, this other stuff sort of one-off, or do you follow what I'm trying to say? In other words, I mean, how should we think about your ability to recognize fuel savings going forward?

I'll let Don answer it. But my view is they are sustainable. And I met with our fuel team yesterday about how we can get more. So under that context, I'll turn it over to Don.

Yes, thanks, Chuck. And so, I touched on it briefly earlier, but we spent some time working with our key fuel suppliers, and really looking for ways that can make us more competitive in the marketplace, while still keeping them viable in a tough marketplace for coal suppliers as well. Are there more opportunities as Chuck mentioned? We are looking for those opportunities, but it's probably going to take some innovative approaches and working with our suppliers to get there, given the economics that we see right now.

I appreciate it, thanks a lot.

I mean, the obvious context is, the competitive generating fleets, both nuclear and fossil are under duress, as a result of current market conditions. The second industry that's under equal or maybe even more duress is the coal industry. And I think what we are trying to do is work together, partner together for the survival of both.

Okay. Would the nuclear fuel, in the free cash flow seemed to have come down, your projection for that in 2015? Is that part of the savings, or is that something else?

There are some savings in there for nuclear fuel. And essentially, what we did there is we were looking at procuring additional nuclear fuel to take advantage of the very low prices of uranium that are in the market today, way ahead of when we needed it. We don't need it for number of years yet. We decided not to do that, mainly on the basis that as we assess that uranium market, we think the pricing is going to stay where it's at for a long time. And so, there was no urgency to try to need to capitalize that on this year.

Great, thanks a lot.

Greg Gordon with Evercore ISI.

Thanks. Mostly all of my questions have been answered already. I was just wondering in the context of your -- telling us that you're trending toward the high end of the guidance range for 2015, is that you're trending toward the high end of the guidance range in all three segments?

Yes,

Or are you doing better than expected in some, and towards the midpoint in others?

We are above the midpoint in all three segments through six months. And that combined with the CFIP results that we talked about, that were are going to get in the second half of the year, are what caused us to say we can point you to the high end of the guidance. So if you're follow-on question is, why don't you kind of change your guidance? The answer is, we have got $1.15 in the bank through six months. Our midpoint of our original guidance was $2.55.

That means we have got $1.40, that we have got to capture, the second half of the year, just to get to the midpoint, and the $1.55 we've got to capture to get to the high end of the range. And we've got a lot of very volatile weather months in the third quarter, and a big third quarter. So we just decided we're going to wait, and see what happens in July and August in particular. And then at the end of the third quarter, when we do this call at the end of the third quarter, we'll tell you where we expect to be more definitively at that time.

Okay. So if we're weather normal or better for the rest of year, then you're comfortable that you're going to be at the high end?

Yes.

Thank you.

Michael Luddy from Goldman Sachs.

Hey, guys, I have a capacity performance related question for you. Can you talk a little bit about, given you're largely coal and nuclear, what you have physically done at the plants to prepare yourself to where you wouldn't -- you would be able to reduce the risk of having to pay penalties for failure to perform when called in emergency hours? What have you done physically at the plants to prepare for this relative, or compared to what you did in prior years?

Well, I would say this. We did a number of things to prepare our plants for the winter of 2014/2015. And in order to ensure they operated reliably for this winter, even in an environment where there weren't any penalties; as far as how we look at that going forward, we're going to make that determination, in terms of how much you are willing to spend on reliability improvement, versus where the capacity performance market clears.

In terms of the specific numbers, I don't think we are in a position to talk about those at this time. We need to see were both the base residual auction, and then where in particular the transition auctions clear, because those are the more imminent. For the base residual, you've got three years to figure out how to get your units reliable for that one. The transition auctions are little more pressing in terms of time. So we'll make those determinations, once we see where the auction results come out.

Got it, thank you. Chuck. Much appreciated.

Paul Ridzon with KeyBanc.

Good morning. Can you just talk about just how you beat your guidance, kind of what the areas of strengths were? And I have a follow-up question after that?

You're talking about our guidance for the third quarter, Paul?

Second quarter.

Okay, for the second quarter, yes, we looked at where we thought we would be based on our plan. We did come out above the high end of our guidance. We deferred some of our plant outages to later in the year, so we picked up a couple of cents there. Distribution, they performed a little bit better, slightly lower O&M. And then, we had slightly better results from our transmission business we've already talked about. So that is what really what drove us above the top end of the guidance in the second quarter.

And then, are you through with your charges at the competitive business, to reposition the portfolio?

They will be substantially finished by the end of 2015. We only have a minor amount carrying over to 2016.

Thank you, very much.

Anthony Crowdell with Jefferies.

Hey, good morning, Chuck. Just I guess, a PPA type question. Since the last call, you had the governor of Ohio announced his intention of obtaining the Republican nomination. Does that complicate the PPA process because sometimes you have campaigns that are more interested in what's better for a national audience, and they'd be not focused on what would be beneficial to like Ohio customers or Ohio rate payers in this case?

My view, it would be I think it's a non-factor. I think the governor's decision to run for president is a political decision, and it affects things that might have been politically. I think he has made it clear all along, that he expects the Ohio Public Utilities Commission to look at this issue, and make an informed decision on this issue. And so, I don't think that would change as a result of his decision.

Great, thanks for taking my question.

Okay, I don't see any more questions in the queue, so we are actually going to end a few minutes early here. I want to thank everybody for your support, and obviously, we feel good about where we are at for -- Philson just popped in there, so I'm going to stop, and let Philson ask his question.

Philson Yim with Luminas.

Just to talk about the $1.55 to capture the high-end for the rest of the year. On LTM transmission is basically already at the midpoint is basically what I see, is that right? And so --

Yes, that's correct, Philson.

Ands so, do you expect transmission to only grow $0.04 for the balance of the year, to get to the high end, or are there offsets there?

No, I wouldn't say there is any offsets. I talked a little bit earlier, I don't think you will see the growth in the revenues that you did see the first half, you saw $0.20 there in the first half. We had guided you to $0.30 in the year I think we're going to be slightly above that.

Some of the offsets that you saw during the first half, were depreciation, general taxes, and interest. They will probably be about in line the second half of the year, as they were the first half of the year. So I think we will trend, as Chuck said, to the upper end of the range on transmission. But it's not going to be the same $0.11 that you saw in the first half.

Okay, thank you. And distribution, to the midpoint there is a $0.10 drop over year expected. But year to date, you guys are tracking at -- are there offsets expected in the second half of the year?

Right now, Philson, we are tracking about $0.01 behind where we were last year, and we guided you to about $0.11 behind. There are a few offsets. We had some improvement in distribution, and we have been helped somewhat by weather in the earlier part of the year. So I would not expect, based on normal weather going throughout the rest of the year, that we would drop-down to the $0.11 that we guided you to.

Got it. Thank you (multiple speakers).

-- be at the upper end also

Thank you, very much. Sorry to everyone for extending the call (laughter).

We had a bet on when it was going to end, and you just cost me a lunch so -- (laughter). Now thanks to everybody. As I said, I think we are off to a great start this year. We feel good about the results. I will tell you, I am constantly impressed with our team here, and whatever we asked them to deliver, they find a way.

Under Donny's leadership, this cash flow improvement team exceeded my expectations. I don't know what you're all expectations were when I told you we were going to get to the $200 million, but they exceeded my expectations. And we are working hard, and will capture those savings over the next couple of years. So thanks for your support, we look forward to talking to you on the third quarter call, and probably many of you in between. Take care.

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