第一能源 (FE) 2015 Q3 法說會逐字稿

Greetings and welcome to the FirstEnergy Corporation third-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, Investor Relations for FirstEnergy Corporation. Thank you, Ms. Beringer. You may begin.

Thanks, Rob. Good morning and welcome to our third-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 certain risks and uncertainties. Factors that could cause actual results to differ materially from those indicated as 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, Executive Vice President and Chief Financial Officer; Donny Schneider, President of FirstEnergy Solutions; John Taylor, Vice President, Controller and Chief Accounting Officer; Steve Strah, Vice President and Treasurer; 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 today. We are pleased to report another solid quarter for FirstEnergy.

Last night we reported third-quarter operating earnings of $0.98 per share, which is $0.06 above the top of our guidance range for the quarter. As Jim will discuss in greater detail, these results reflect a solid performance across all three of our business segments.

Based on our strong third-quarter and year-to-date performance, we are raising and narrowing our full-year 2015 operating earnings guidance to a range of $2.67 to $2.75 per share, from our previous range of $2.40 to $2.70 per share. This is shaping up to be a great year for FirstEnergy and as we look forward to 2016, our employees can be proud of what they have achieved.

In addition to strong earnings, we have made tremendous progress on key initiatives that can provide us with greater strength and flexibility as we work to achieve our future goals. So far this year, we have clarity on the results from two of these initiatives, the cash flow improvement project and PJM capacity market reforms. We continue to make progress on the third initiative, the Ohio ESP.

As we discussed in July, our cash flow improvement project exceeded our initial target and should generate at least $240 million in cash flow improvements by 2017. That project, which solicited cost saving ideas from across the Company, is rolling out as we expected and we remain fully on track to capture the $58 million in cash flow improvements identified for 2015.

Overall, this effort is not only establishing a new cost structure for the Company, it has also helped us initiate a culture change around spending. Employees continue to provide suggestions for meaningful and sustainable ways to reduce our cost structure, which could drive modest incremental savings going forward on top of what we have already communicated.

We're also cautiously optimistic about capacity market reforms that are now in place at PJM. Results from the base residual and transitional auctions held in August and September were in-line with our expectations, with the pay-for-performance model resulting in clearing prices that come closer to reflecting the true operating cost for our generating plants.

You will recall we raised our 2016 adjusted EBITDA guidance range for our competitive business in September as a result of the higher capacity prices, and all of our uncommitted generation clearing the transitional auction for the 2016/ 2017 delivery years, and we are reaffirming that range. We are also raising and narrowing our 2015 adjusted EBITDA guidance based on our year-to-date results and the impact of our cash initiative.

While Jim will provide more of the details about adjusted EBITDA for our competitive business in a few minutes, I wanted to take a moment to address our current thinking about 2017. All of our uncommitted generation cleared the 2017/2018 transitional auction as well. But as you know, our proposed purchase power agreement in Ohio would impact generation sales for seven months in 2016 and the full year of 2017. While we considered providing an adjusted EBITDA range for 2017 on this call, we ultimately decided that we do not have enough information yet to offer a constructive view. We remain committed to being transparent and we intend to provide you with this outlook once there is more clarity.

With that said, we are pleased that the combination of our cash flow initiatives and PJM capacity revenues from recent auctions, will further strengthen the overall cash flow position for our competitive business. And you will recall that we already expected that business to be cash flow positive through at least 2018, prior to the incremental benefits of these two initiatives.

Many of you have asked if we intend to shut down additional plants. I tell our employees we are working hard to ensure all remaining generation remains viable. The results of the Ohio ESP and future auctions will give us a better understanding of the longer-term outlook on our at-risk baseload power plants, and we continue to consider fuel and transportation contracts as well as environmental matters, such as the EPA's clean power plan, which was finalized in August.

We are particularly interested in that rule's treatment of existing nuclear generation, state-specific emission reduction targets, the compliance timeline and state flexibility. While we are advocating for an interpretation that allows for a thoughtful engineering-based approach to ensure reliable energy resources for our customers, we will not have full clarity on the rule's impact until state implementation plans are submitted, which could be as late as 2018, and then approved by the EPA.

To ensure that our critical baseload lower power plants continue operating and to help safeguard our customers against price increases and volatility, we remain committed to our Ohio Electric Security Plan. The evidentiary hearing for the ESP began on August 31, and rebuttal testimony was filed last week. We currently expect a decision by early 2016, and we continue our discussions with the PUCO staff and other parties to reach a positive outcome for Ohio customers.

In fact, you may have noticed that Leila is not on the call today. She is in Columbus working on the ESP as we speak. I think that is where we would all rather have her.

Once we have an outcome in Ohio, we have the information necessary to more fully assess FirstEnergy's earnings for 2016, regulated growth in future years, as well as our cash flow over the next several years. As we have talked about previously, at that point we will determine future equity needs, if any, to help support our regulated growth initiatives.

We are also laying the groundwork for sustainable reliability investments in Pennsylvania. Last week, our four utilities in the state filed long-term infrastructure improvement plans with the Pennsylvania Public Utility Commission. In total, these plans call for a projected increase in capital investment of nearly $245 million over the next five years to strengthen, upgrade and modernize our distribution systems.

We are anticipating the PUC's approval of the of LTIP proposals by mid February. Once we have approval of the plan, we use the distribution system, improvement charge at each company to recover the appropriate fixed costs that are part of the plan.

In New Jersey, we are further enhancing our current service reliability program with an additional $25 million in spending in 2015. These expenditures, which our expected to have a $0.04 per-share impact on fourth-quarter 2015 earnings, will not only enhance our current service reliability program, but also demonstrate our commitment to make JC P&L a stronger company.

Of course a significant part of our growth plan includes our Energizing the Future transmission initiative, which remains on pace to invest $970 million this year, with about 80% of that amount spent year to date. Recent projects include final planning and preliminary site work for a new substation near Smithfield, West Virginia, that will support the shale gas industry and enhance service reliability in Mon Power.

We are also nearing completion on a transmission reinforcement project, including a substation and 6-mile 138 KV line Harrison County, West Virginia, that will enhance service reliability for more than 14,000 Mon Power customers in Harrison, Lewis and Gilmore counties. We expect the substation to be energized in December.

We are pleased to report that late yesterday afternoon, FERC approved our settlement agreement for ATSI's forward-looking formula rate structure. In addition, our proposal to move our Met-Ed, Penelec, JCP&L transmission assets into a new affiliate called Mid-Atlantic Interstate Transmission, or MAIT, is through to the FERC and state approval process.

We continue to seek final state approval for MAIT by mid-2016. If approved, we expect this structure to facilitate investments that can improve service reliability for these utility customers. Lastly, we remain committed to holding an analyst meeting after we have results from our Ohio case.

Now, I'll turn the call over to Jim for a brief review of the quarter and our expectations for the remainder of the year. As always, we will reserve plenty of time for your questions before the end of the hour.

Thanks, Chuck, and good morning, everyone. Before I get started, I will remind you that more detailed information about the quarter can be found in the consolidated report that was posted to our website yesterday evening. We also welcome your questions in the Q&A following the call.

Our strong third-quarter operating earnings of $0.98 per share compares to $0.89 per share in the third quarter of 2014. On a GAAP basis, earnings were $0.94 per share for the third quarter of 2015, compared to $0.79 per share during the same period last year.

Our operating earnings primarily reflect higher distribution sales and the net impact of previously resolved rate cases, higher transmission revenues that resulted from our Energizing the Future Initiative and ATSI's forward-looking rate structure and higher commodity margin in our competitive business, partially offset by higher operating expenses and a higher effective tax rate.

In our distribution business, residential sales increased 9% and commercial sales increased 2.6%, compared to the third quarter of 2014, primarily resulting from cooling degree days that were 36% higher than last year and 13% above normal. Adjusting for weather, however, residential deliveries decreased nearly 1% and commercial sales were down 2.4%, reflecting the impact of energy efficiency mandates.

As we mentioned during our second-quarter call, we are examining the usage trend in all three customer classes, particularly the impact of energy efficiency on residential usage, and we will be prepared to discuss our load forecast in more detail during our analyst meeting. However, we do believe we are seeing the effects of energy-efficient lighting sooner and with a larger impact than previous estimates.

In the industrial sector, sales decreased 3.2% in the quarter as a result of lower usage from our steel, coal mining and electrical equipment and manufacturing customers, partially offset by increased usage from the shale gas and automotive sectors. In our transmission business, third-quarter operating earnings increased $0.04 to $0.17 per share as a result of higher revenue associated with a higher rate base and ATSI's forward-looking rate structure, which began in January.

In our competitive business, operating earnings increased $0.09 per share compared to the third quarter of 2014. Commodity margin increased $0.15 per share due to favorable summer weather that was warm but not extreme, coupled with lower commodity costs.

Contracts sales volume decreased in line with our expectation, while wholesale sales volume increased slightly. Variable margin benefited from higher capacity revenues, lower purchased power costs and fuel expense and lower transmission charges. Operating cost increased compared to the third quarter of 2014, primarily due to greater expenses related to a nuclear refueling outage this quarter of Beaver Valley II.

We remain committed to our ongoing strategy of mitigating risk by reducing sales to weather-sensitive channels and have reduced the size of our residential retail book by approximately 38% since the third quarter of 2014, and also reduced the size of our weather-sensitive commercial and industrial book over the same period.

Looking at our sales position for 2016, we have about 59 million megawatt hours, or about 75% of our expected generation resources committed, and we are currently about 45% committed for 2017, with about 36 million megawatt hours sold. As Chuck discussed earlier, we are raising and narrowing our 2015 adjusted EBITDA range for the competitive business to $945 million to $975 million from $875 million to $950 million based on our results through the first nine months of the year and the projected savings from the cash flow improvement project.

We're also reaffirming the 2016 adjusted EBITDA range that we provided in September of $950 million to $1.050 billion. And as Chuck mentioned, we intend to provide 2017 adjusted EBITDA after the Ohio ESP is resolved.

Moving to other financial matters, during the September investor conferences, we received questions about our pension funding plan, so we wanted to spend a moment clarifying this topic. As we do each year, we disclosed our estimated pension funding requirements for the next several years as of December 31, 2014, in the Form 10-K that was filed in February. And as always, we include those future funding estimates in our internal long-term planning process.

You will recall that we contributed $143 million to our pension fund earlier this year. Consistent with our normal process, we will provide an update for estimated funding requirement for future years when we file our 2015 Form 10-K this coming February.

I will also note that we have essentially completed our financing plans for 2015 and our expected financing plans for 2016 do not include any issuance of long-term debt until the middle of next year. As Chuck said earlier, 2015 is shaping up to be a strong and important year for FirstEnergy as we create a new framework for our future. We have raised are operating earnings guidance based on the success of our strategies and we are making solid progress towards our goals of building long-term value for shareholders through predictable, customer-focused, regulated growth.

Now, I would like to open the call for your questions.

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

(Operator Instructions)

Our first question is from Anthony Crodell with Jefferies. Please proceed with your question.

Just a quick question, I guess on Ohio PPA. I'm sure it will be a trend for the call. I believe the record closes today in Columbus. Does the closing of the record complicate the chances of a settlement since nothing new could be introduced?

I don't think it complicates the opportunity for a settlement at all. I think we have the opportunity to settle the case all the way through any final outcome, actually. It closes the record as far as anything new being introduced into the record as far as testimony and rebuttal testimony, but it doesn't prohibit ongoing discussions.

Great. Thanks for taking my question.

Our next question is from Gregg Orrill with Barclays Bank. Please proceed with your question.

Thank you. Maybe a follow-up there on generally how you are feeling about the process of negotiating the PPAs and whether you feel you have better likelihood of nuclear versus coal?

Well, as I have said all along, I think that the plan that we filed is the best plan for the customers in Ohio. We continue to work to educate the Commission staff as best we can on why we believe that is the case. I think we are continuing to discuss certain parameters around the filing but I would expect that as we go forward, we are going to continue to talk about the PPA in somewhat the fashion that we filed it. Now, having said that, there is always some room for negotiation but I think the whole idea here is, we filed a plan that is good for customers, protects them over the long haul, and at the end of the day, as I have gone through the example of what happens when plants close in the past, it creates spending in transmission that customers pay for. So I think this plan kind of his neutral to what the transmission spending would be. I still think its something we can get to -- across the goal line with.

Maybe just a question around the pension mark to market, and kind of your treatment there and that, that doesn't not show up in the earnings guidance, how you were thinking about that?

Gregg, this is Jim. It will not show up in our operating earnings guidance. We have historically treated that as a mark to market. In fact, if you look at our consolidated report, we put a disclosure in there of what the range of potential impact to our GAAP earnings would be if we were to mark that pension plan effective September 30. Effective September 30, our plan had a loss on our return on assets of about 3.5% and a discount range was 4.25%. We put a range in there assuming that our assets return will remain at that level, and the discount rate would be anywhere between 4.25% and 4.5%.

As you know, October has been a very good month in the equity markets. In fact, it's probably been one of the strongest in months in history. The return on assets have improved somewhat. If we had to mark that today, our discount range would be in the 4.5% range. My expectation, all things being equal, if they don't change from today, that range that we gave of $0.30 to $0.67, it would be at the lower end. In fact, it may be less than $0.37 and maybe less than the $250 million we disclosed.

From a funding standpoint, we've disclosed in the 10-K last year that it would be above $1.7 billion for the period 2015 through 2019. We did contribute $143 million this year. From a funding standpoint, we will have to see where the discount rate is and where the return on assets are at the end of the year, but I don't expect anything to be materially different than what we've disclosed in our 10K in 2014.

Great. Thanks.

I would just follow on a little bit to Jim's answer that I think we have been very open in disclosing what our pension funding obligations might be and the impact on our GAAP earnings. But from the very beginning of me coming into this position, one of the things we talked about was earnings quality and I think this quarter, $0.94 and $0.98, GAAP versus non-GAAP, we have really reduced that gap between GAAP and non-GAAP, as I told you I would. And I think our earnings quality for all three quarters is substantially improved and that's the way we expect to operate going forward.

Thank you. Congratulations on the quarter.

Thanks.

The next question is from Paul Zimbardo with UBS. Please proceed with your question.

Good morning. Another [OhPi] question if you will. We've seen a few data points on potential new build in Ohio recently. I was hoping you could comment on how, if at all, you see these developments impacting the discussion, the Ohio Commission (technical difficulty).

I wouldn't expect that it should have any impact on the discussions we are having with Ohio. Conversely, I don't think the discussions we're having with Ohio should have any impact on any decisions for new builds, because the construct of our energy security plan, it has no impact on the competitive markets. So I don't think the two are linked at all.

Okay, great. And then an unrelated question. I noticed the revolver borrowing declined about $1 billion quarter over quarter. Could you comment if this represents change in how you see the financing structure?

Yes, I'm not sure that the revolver borrowings increased $1 billion quarter over quarter. In fact, if you look at our entire financing plan for the entire year, we expect to increase debt just by about $350 million year over year, and most of that will be new long-term debt associated with the distribution and transmission business. In fact, our revolver borrowings at the end of 2014 were about $1.8 billion and my expectation is that they are going to be right in that range, maybe slightly less than that by the end of the year. So there is no impact on our financing plans there.

Okay, I just looked at the short-term borrowing declined $1 billion. I know you mentioned the past you were trying to, or considering terming -- (inaudible - multiple speakers).

I thought you said that they were up and that was what was confusing me. Right, they would be down.

Okay. To clarify, is that an indication you are trying to term more out or is that normal fluctuation quarter to quarter?

That's normal fluctuation. It's not that we are terming any of that out.

Okay, great. Thank you very much.

Our next question comes from Mr. Chris Turnure with JPMorgan. Please proceed with your question.

Good morning, guys. I wanted to get a little bit more clarity on transmission CapEx going forward basically versus the current CapEx that you have laid out in your slides. If you are successful with an elevation of the assets in New Jersey and Pennsylvania, how can we think about directional potential changes there in magnitude?

Well, you are going to have to wait for the analyst meeting. We've talked about $4.2 billion of transmission spend, a four-year period from 2014 through 2017. At this point in time, I'd not prepared to say what we expect that number to be 2018 and beyond. But I think as we get through the Ohio ESP and then we see the Company that we have a base to build upon after that, I think what we have our analyst meeting we will talk to you more about what we expect to do in the future.

Okay. And then on cost cutting, you indicated that there is a potential to increase the numbers. As you've laid them out right now, the numbers are pretty meaningful over the next several years but they do mostly come from the unregulated side of the business. Could you talk a little bit more in detail, maybe, about what you are looking at that is incremental to this? Any opportunities, more specifically, on the regulated side of the business there?

First off, I wouldn't expect them to be substantial. And what I've kind of challenged the team to do is that we need to continue to find efficiencies in this business that will offset any inflationary forces on our cost structure. Specific to the utility side of things and in an environment where we are investing and reliability improvements, now pretty much across our footprint, taking cost out of the utilities doesn't make sense right now. I wouldn't expect to see a lot of it come out of the utilities. We are taking any incremental -- now, that doesn't mean we are now focusing on efficient spending in the utilities but as we create efficiencies, we are recycling that back of that into more investment and more improved service for customers, rather than pulling it out and, ultimately, reducing the cost structure for the utilities.

Great. Thank you.

Our next question is from Mr. Dan Eggers with Credit Suisse. Please proceed with your question.

Good morning, guys. First question for you on transmission guidance increase. CapEx has been in line, basically, with plan but the earnings power from transmission's probably 10% higher than you had budgeted for the year. What are you ascribing that improvement to? How should we think that capitalizing the new baseline for 2016 and beyond?

Yes, this is Jim. The way I would look at that, Dan, is that when we went into the year, we had some relatively conservative assumptions because of the uncertainty with the forward-looking rates within ATSI, not only the ROE but potential refunding in that. I would say our initial estimate was somewhat conservative and we also have a little higher rate base associated with in-servicing some of the projects sooner than we had anticipated.

When I would compare say 2016 to 2015, clearly, we will give you more guidance at our analyst meeting but I would say the headwinds we are going to face next year is we're going to have a lower ROE in ATSI so that's going to impact are earnings somewhat. And some of our transmission spend will be directed towards the former GPU companies where they are still on state of rates and I would not look for formula rate recovery until the beginning of 2017. I would consider, probably, 2015 and 2016 years to be somewhat flattish, and then we will move on in 2017 once we have the MAIT completed and investments going towards the GPU companies.

That was helpful, thank you. On the demand response case, the Supreme Court's heard it now. You guys are very invested in the process. What was your read on what happened at the Supreme Court and then your expectations for when we will get a decision? And then whatever adoptions that the PGM will have to make?

I should have preempted all of these Q&A by stating, as I said earlier, Leila is not here and I don't think you want any of us other than Leila judging what is happening at the Supreme Court. Here is what I'll do, Dan. Irene will talk with Leila and we will get back to you on that one. I just don't feel comfortable answering technical legal questions.

Okay, that's fair enough. Jim, looking back on the 10-K on the pension, I know this is still bubbling out there. You guys had set out about $880 million for pension funding and 2016 and 2017 and then $646 million in 2018/2019. Are those still realistic? Is there a way to shift some of the timing of that money being put to work?

No. Those are still pretty much realistic. Those are based on requirements, Dan, it's not that we can shift money around. We could fund more earlier, but you look at what you're funding has to be over a seven-year period. You have to find at least that amount. I don't expect when we update that 2016 and 2017 will be much different than what we disclosed in our 10-K for 2014, but we will just update some of the outer years based on where the return on the assets are and where the discount rate is.

You know, the Senate that just passed, I guess they call it the bipartisan budget bill, it extended the funding or the smoothing requirements three additional years through 2020. That will give some type of relief because you will be able to use or historical discount rate during those funding periods. That will lessen, all things being equal, our funding requirements over that period in time.

So do your assumptions in the 10-K, are those reflective of the extension of the smoothing? Or what that lower that number?

No, the 10-K that we file 2014 did not take into account any of the changes to the smoothing. Primarily, that smoothing doesn't impact our funding until year 2019.

Okay. And then I guess just on the financing side of it, you guys have been keen not to talk about equity needs and that sort of thing, but should we expect a more comprehensive planning update at the Analyst Day? Would that then include whatever you would help to fund for the pension perspective?

Yes, I think that is the whole game plan, Dan, is let's get Ohio behind us, one way or another, find out where that leaves us. We know pretty much where capacity performance landed and we know what we have done internally to strengthen our cash flows. I think at that point in time, we're going to give you more of a view towards the future. 2015 has been all about kind of strengthening the base that we want to build from.

Okay, great. Thank you, guys.

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

Good morning. Can you hear me?

Good morning, yes.

Just to follow up on Ohio for a second. If you guys work to get a settlement, what would the process be in terms of after that? Would there be -- I would assume there would be comments and stuff on that? How much time before -- after settlement do you think it would take for approval of that settlement to take place?

Yes, there would be an opportunity for comments. I expect we're going to end up at the same place here regardless of a settlement, which is an outcome that is finalized early next year.

Okay, and by early, you mean first couple months?

Well, I would think so, yes.

Okay. In terms of the pension funding, could you remind me, how much the breakdown is between regulated and non-regulated, where that obligation lies?

I would say that probably about 60% of the unfunded would reside in the regulated like companies.

Okay. And then you mentioned some intriguing stuff about the energy efficiency in lighting and how the deployment of that has been a little more aggressive than you previous had thought. I was wondering if you could elaborate a little bit on that in terms of what sectors you are seeing that in and what customer classes?

Yes. From my standpoint, the biggest impact has been in the residential sector. We've seen somewhat in commercial. Typically, commercial customers will move towards more energy-efficient products sooner than residential but when you think about the lighting, the federal energy efficient lighting standards kicked in, in 2015. You cannot buy an incandescent bulb right now. We always expected that we would see some impact to our residential usage associated with that. It's just happening a little bit faster than we had originally planned on, on our original load forecast.

How much I mean -- why is that, do you think? Because like you said, all of this stuff is sort of known. Could you give us a little more flavor of how much more of this you are seeing? And why you think you are seeing it?

You know, it's hard for me to talk about customer behavior, especially this early on, but my suspicion is that the cost of these bulbs are coming down, and they are being offered in a number of stores and consumers are just switching to those bulbs sooner than we thought they would be. As we said, we're looking at this pretty closely right now and we should have a better view on that when we come to the analyst meeting. As we said, we ultimately knew this was going to happen, it's just maybe happening a little sooner than we expected.

Okay. We'll find out, obviously, the analyst meeting what it means for the energy efficiency impact, but I would suggest that you guys are expecting to see more sooner than previously thought. Is that out we should view it?

Yes, we will have that built into the load forecast that we have.

Okay, thank you.

Thank you. Our next question is from Mr. Paul Ridzon with KeyBanc Capital Markets. Please proceed with your question.

I had a real quick question about CES fourth-quarter drivers. I think if I'd done my math right, you're looking for a flattish quarter versus 4Q last year after you had a nice pick up in the third quarter?

Yes, I would say, yes, during the fourth quarter, we would expect that the earnings would be pretty much flat quarter over quarter.

We're getting a big capacity pick up, aren't we?

Yes, we are, but we have Beaver Valley that's out in essentially, in the entire month of October.

Got it, got it. Okay, thank you very much.

Thank you. Our next question comes from Mr. Charles Fishman with Morningstar. Please proceed with your question.

I just had one left. On the LTIP that was filed in Pennsylvania a couple of weeks ago, it implies from the release, that's a quarterly rate writer. Is that a done deal? Is that legislation? Or is that a Commission precedent or another utility that's done that? You are pretty confident you will get that quarterly rider?

Well, the way the process works in Pennsylvania is you file a long-term infrastructure improvement plan, which pretty much details the types of investments and the impact for customers that you expect to achieve. The Pennsylvania Public Utilities Commission reviews the LTIP. Once they review and approve the plan, then recovery under the distribution system cost recovery writer is essentially, it's a legislative recovery and is essentially very certain after that, as long as we spend what we said we are going to spend and do what we said we are going to do.

Okay. That was the only question I had. Thank you.

Thank you. Our next question comes from Ashar Khan with Visium.

Congrats on a good quarter. Chuck, just going back to the expectations of getting this case done by early year, is it fair to assume that if we are able to reach a settlement, it should come in the next month or so?

I'm not going to handicap it, Ashar. We are working every day, talking on the phone. Leila is down there meeting with the staff today, working through a lot of complex issues and it's a very complex case. I don't want to put pressure on Leila nor on the Commission staff or any of the other parties we are talking with. We just keep working through the process and I believe that there is an opportunity for an ultimate settlement because I think that we are getting to the point where everybody is starting to really understand why it's good for customers.

Okay. I appreciate it. Thank you so much.

Thank you. Our next question comes from [Pervul Maita] with Citigroup.

Hi, guys. A couple of quick questions, one on CES. When we look at 2017 fact book and we look at the breakdown of the hedges and the contracted revenues that you have, it looks like there is a significant proportion that's fairly open right now, there's just 36 terawatt hours that's committed sales and the rest is open. Do you expect more committed sales to happen in the buckets of the MM, MCI, LCI, GA board? Those structures, do you expect more contracting or committed sales to happen in 2017 for that is it generally all going to flow into the wholesale bucket?

The first item is, it does not contemplate the PPAs in Ohio at all. If we are successful in getting the PPAs done, that will reduce that by about half. Donny, go ahead.

Chuck is absolutely right. With the PPA, we only have about 3 terawatt hours open in the front half of 2017 and about 16 terawatt hours in the back half. To answer your question, with the PPA, we would move that into our sales channels. Regardless of the PPA, we'd move it into the sales channels. We would not take it all to the wholesale market. Without the PPA, you've got about 41 terawatt hours. Again, more heavily weighted on the back half of 2017.

Got you. And that 41 terawatt hours, if there is no PPA, would be moving into the wholesale bucket?

No, no. We would move it into our LCI, our polar, all of our channels. Wholesale is kind of our last resort, if you will, because we don't make much margin on that.

Fair enough. So off the 80 or so terawatt hours in total, approximately 40 would be committed in the non- PPA scenario?

No, we would still hold some back for the spot market. We would hold back probably about 15 to 20 terawatt hours into the spot market.

I've got you. Just so I'm clear, what is the total committed sales you would expect in a non- PPA scenario for 2017?

It would be about 75 minus 15 or 20, so about 55 terawatt hours.

I got you. Okay. Got it.

What Donny is describing is we are going to run that business kind of like a utility. We're going to sell forward two-thirds to three-fourths of our available generation. We're going to keep, as he said, 15 million to 20 million megawatt hours open to use as, what I refer to, as reserve margin to ensure ourselves against hot weather days, cold weather days. To ensure ourselves against a unit that does not perform as expected and, essentially, be able to deliver more consistent earnings out of that sector than what we have been able to do in the past because we were exposed to volatility and we were exposed to poor performance by our generating fleet.

(Multiple speakers) Sorry, go ahead.

I would just add that if you look at our fact book on slide 98, page 49, it lays out those sales channels and our ranges around it.

Yes, exactly. I'm just saying that I looked at the fact book for 2017 and had 36 terawatt hours of committed sales I was trying to bridge to what would look like in actually 2017 if you had no PPA and that was helpful color that you gave me.

Sure.

If I were to bridge to that number that you just said, as you exit certain MCI, MM and LCI contracts, how does that shape the 2017 committed sales? I'm just trying to understand, what would be the proportions of the different buckets as you kind of think about in a non-PPA scenario what it would look like for the committed sales?

Yes, so I would say and a non-PPA scenario, if you look at our 2016 EBITDA slide, that's going to give you the pretty good proportions. We are not intending to change those proportions.

Fair enough. Got you. Thank you. Finally just a quick question on NOLs. I know that NOLs clearly help from a deferred tax perspective right now. Do you see them as a 2017/2018 timeframe full utilization of NOLs?

Yes, our expectation is that -- well, first, bonus depreciation, we think its likely to be extended through the 2015 and 2016 time frame. That's not part of the budget bill but it's typically done usually at the end of the year in an extender. If the bonus depreciation is not extended then we will likely expire our NOLs around the end of 2018 or into 2019. Assuming bonus depreciation is extended, then we could go out further into the 2020 time frame. Again, that would be impacted by the resolution of the Ohio ESP.

Understood. Got it. Thank you so much.

Thank you. Our next question is from Mr. Ryan Caylor with Tudor Pickering Holt.

Good morning.

Good morning.

Just back to the Ohio PPA real quick, just a quick question on timing. AEP, on their Q3 2015 earnings call, they gave a year-end 2015 expectation for a final order for their PPA. I guess, it's our understanding that you guys are further along in the process, right? Is that difference in timing a matter of AEP just being a little more aggressive relative to your early Q1 2016 timeline? Or any color there relative to AEP would be helpful. Thanks.

Well, I would say that I think we are all just kind of trying to speculate about what could happen. We're being a little more conservative, maybe, than AEP in that traditionally, there's not going to get a lot done in December after Thanksgiving. For our case to get settled by the end of this calendar year, they would have to work pretty hard, pretty much the whole month of December, I think, to meet the timetable so we are just expecting it will likely get done after the first of the year.

Got it. That's helpful. Thanks.

Okay, will I don't see any more questions on our call. I want to thank you all very much for your support. And I'd just say look forward to seeing you a week from Monday at EEI. I'm sure we will go through all these same questions again. Thank you.

Thanks, everybody.

This concludes today's teleconference. You may disconnect your lines at this time and we thank you for your participation.