Firstenergy Corp (FE) — Q2 2015 Earnings Call Transcript

Thanks, Brandon, and good morning. Welcome to 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 this indicated by such statements can be found in 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; Jon Taylor, Vice President, Controller and Chief Accounting Officer; Steve Staub, Vice President and Treasurer; and 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'm pleased to have this opportunity to share an update on what has been a very busy and productive period for FirstEnergy. We're 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 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 driven by higher earnings in the Transmission business and the benefits of our more conservative strategy in our Competitive business. We continue to make solid progress on 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 project design 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 rates structure for ATSI, and on July 20th, we filed with FERC a settlement agreement that maintained ATSI’s ROE at 12.38% for the first six months of this year. Under this 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're 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 requests 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 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're doing for customers connected to our ATSI Transmission system. We're seeking approval from FERC in six months and from the State Commissions by mid-2016. Before 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 Electric Security Plan. Let's start with the results of our cash flow improvement project. I'm pleased to report that we expect this project to result in cash flow improvement 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 implementing a selective hiring program. There are also nearly 100 smaller items that collectively make a strong impact. About 65% of this savings is expected from operating expenses and 35% from capital and nuclear fuel improvements over the three-year period. On page 170 of our FactBook, 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 have 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 PJM’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 is still scheduled to begin August 10th. The 2016-17 and 2017-18 transitional auctions were delayed slightly and are now scheduled to begin on August 26th and September 3rd, 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 the 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 30th of this year. At our regulated fleet, the cost estimate was $192 million, with $105 million of that spent through June 30th. I will also mention that we are moving forward with all aspects of the construction of the new dewatering facility for our 2,400 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've previously mentioned, all costs associated with this project are in our current capital plan. Finally, let's move to our Ohio Electric Security Plan. Based on the current procedural schedule, 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 for the future that ensures safe, reliable, clean, and affordable power for all Ohio customers, from industrial facilities to homeowners. Given the plan’s benefits, including the economic development support, we believe our filing meets the criteria outlined by the commission and will remain optimistic that this plan will result in sound state energy policy for our customers. We had a solid first half since the start of the year. We have made tremendous progress toward our goals of investing in customer-focused growth, supporting sound energy policy, and strengthening our company from within. We know there is still 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 turning favorably versus their midpoints. We’re 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 in 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 seven-tenths of a percent 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 over 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 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 for midstream activities through 2019, our forecast reflects greater confidence in the 2015 and 2016 project, which represents 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 a forward-looking rate structure that began in January. In our competitive business, operating earnings were $0.01 per share compared to the same period last year, reflecting higher commodity margins associated with higher capacity revenues, a modest increase in wholesale sales, and lower contract sales. Additionally, operating costs decreased year-over-year largely due to improved planned performance. As we said last quarter, we had 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 wholesales 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 the 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 and to 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.

Hey, good morning guys.

Hi Dan.

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

Well, I’ll take the first question and then I’ll hand the second part of it off to Don Moul 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 timeframe to complete this study. We can operate it at that speed, but our suppliers don’t necessarily operate at that speed. So we’ve got a number of items in the queue that we’re still working on to try to get it across the finish line. So I think there is some opportunity to improve this over time. I’ll let Don tackle your fuel question.

Yeah. Thanks, Chuck. When you take a look at the CFIP savings, as you noted, Dan. One of the most significant savings in the initiative comes from reduction in the fossil fuel cost. That sort of savings is about $151 million; that 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. We have about $50 million associated with the refined coal process where we partnered with several third parties to produce the coal that reduces emissions. We have a contractual relationship where we paid for every kind of coal that’s treated and the third party receives a tax credit under Section 45 of the tax code. These contracts are now in place with Sammis and Mansfield Field 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 writing items, including reagent and waste disposal costs. As Chuck said, these are already under contract. We’ve 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 these market challenges and try to find ways that we can partner in a win-win kind of an approach. So we have been successful so far and we look forward to working with them in the future.

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

Okay. Got it. I guess, can we turn to the Ohio PPA structure, and kind of it keeps getting pushed out from a time perspective? Should we read anything into maybe some change in tone at the governor level or at the commission level, if they are 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 gets out there?

I’ll let Leila take it and then I may follow on.

Okay. 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 what’s happening with the capacity performance. I don’t think that that should be the be-all end-all; I think those are data points, but I also think they are mindful of the fact that our current ESP ends in the middle of next year. So there are 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 with regard to the timing of it with hearings starting August 31. One thing I would like to point out is that after the last call, we continue to be in negotiations. Since our last call, we were able to add Kroger as a signed party. I think what is presented to the commission is a very robust settlement. I am still very hopeful that we will be able 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 about how it ties into the clean power plant and other things, 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. Obviously, we are anxious to keep it moving forward.

And just to clarify, the timeline is; the hearings are August 31. Can you just walk through the steps in there to where final resolution should play out if it goes through litigators without a settlement?

At this point, I would like to say we would get it done by the end of the year, but I am thinking it might slip into the very first part of next year, so early 2016 for a final decision.

Okay. Thank you, guys.

Hi, good morning.

Hi, Neel.

The transmission business seems to be doing well. And I think in the past, you mentioned that maybe about a $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 transfers?

Well, I think there are several factors. We’ve communicated our plans for the next several years and they amount to about $1 billion a year. MAIT will provide additional opportunities if we’re successful in getting it done. Our transmission infrastructure has aged, and we’ve talked about a queue of projects that could potentially go on for a long time at that rate of $1 billion a year. At that point, 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 tactic 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’re 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.

Yes, good morning. Thank you. Could you provide your thoughts on the appeals to the Supreme Court of Ohio regarding the AEP PPA proposal? Do you believe this is relevant to your situation, and do you think the Supreme Court will take on the case?

Greg, this is Leila. I think right now that those appeals are premature. There is still absolute hearing associated with that case in Ohio, I don’t see how you get the Supreme Court to take those up when absolute hearings are pending. So I fully expect those cases, those appeals to be dismissed. Does it mean they can’t refile them at a later date? But again, I think they are prematured. So I don’t think they are going to have any effect on our case. And with regard, I read some conjecture that if they went forward somehow things would be stayed in Ohio as the case is going before the Ohio Supreme Court, the decision goes forward, the commission decision goes forward and is not stayed unless a specific statutory provision is met. And under that provision, the party that is requesting the stay needs to provide and post the bond. So that’s a very high hurdle to assume within the context of this type of cases. So again, bottom line, no effect.

Good morning, guys.

Good morning.

I have a quick question about the transmission. You reported an increase of $0.11 in the first half of the year. Does that figure include any adjustments for settlements? Have you accounted for any charges related to the lower return on equity this quarter, or will that be addressed in the second half when things are finalized?

There wasn’t a lower ROE this quarter. We got 12.3% in place for the first six months of 2015, which was a partial contributor to the better performance in the transmission segment.

Just curious, Chuck, whether you might have had to recognize the lower return that will come in the second half of the year ahead of time, but it sounds like none?

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

So the moving part, as we think about the second half of 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 are going to have a much higher rate base that you’re going to compare to in '15 compared to '14. In the first half of 2014 that rate base 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 comparisons in the second half of 2014, that rate base was going to be about $922 million compared to $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% in 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.

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

So, we can catch and we think they are getting the clarity on ROE is a big help too. So, I just wanted to understand the mass of bridging the second half.

Okay.

Hi. Good morning.

Hi, Steve.

Hi, Chuck. Two questions. First, is there any schedule that’s been said so far on the filing on the MAIT approvals, I guess particularly in the states, Pennsylvania, New Jersey?

So, right now, interventions were due by July 10th. I don't see any further procedural schedules that with regard to that, although we would expect a decision by December 2015.

And that’s in which state?

That will occur this year. I’m sorry?

Which state?

So that’s with respect to FERC and then…

Got it, FERC. Okay.

...to Pennsylvania, interventions on August 3rd; pre-hearing conferences in...sometime, August, September date, and then a decision mid-2016. And with respect to New Jersey, there are no deadline interventions and we would expect an order again with regard to that by mid-2016.

Okay.

So, no specific hearing dates.

And 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 only would consider equity to a degree that there would be additional growth beyond your current capital plans. Is that correct?

What I mentioned earlier is that once we see improvements in cash flow, the results of capacity performance, and our status with the ATSI, we will evaluate the potential for equity to support growth in both transmission and distribution, if necessary. Throughout this process, I want to avoid using equity merely to fix our credit metrics and enhance the balance sheet. This is the reason we initiated the CFIP project, and I believe we've made significant advancements there, leading to stronger balance sheets, cash flows, and funding from operations, as approximately two-thirds of it relates to operations and maintenance. After assessing the outcomes, we can make informed decisions moving forward. During our Analyst Meeting, likely scheduled for early next year, we will provide a clearer update on our position.

Okay. Great. Thank you.

Good morning.

Hi, Shaw.

Just one quick question on the delay of the ESP. Obviously, we just get a little bit of the sense on the status of the upcoming polar auctions and sort of, if there is a potential impact on your hedging profile and obviously you’ve been lowering your weather sensitive hedges. But kind of curious on sort of 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 Porter, to get additional data points before having to make a decision. Although even though the transitional options have been pushed back, by the time we complete hearings of 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 polar auctions for flow to deliver, 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 hearing. I’m going to turn it over to Don with regard to the hedging part of the question.

As similarly with other market participants, we are going to have to adjust based on what that polar auction schedule is. Obviously, we try to build our planned ratably hedged through the year. If we need to, we will adjust to other channels, including our wholesale channels, if we have to sell forward to lock in some of that volume and eliminate price risk from a portfolio.

Excellent. That was it. Thank you very much.

Hi. Good morning.

Hey, Julien.

So, first question here. In terms of the timing, you obviously talked about at the Analyst Day early next year, but EEI this year in 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’ve typically given you at the EEI, which is our best look at the future across all of those. Yeah. And we are not going to hold anything back there. But I don't think we can talk about the long-term plan beyond the next couple years until we have the answers 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 clearer if you can or perhaps maybe 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?

Julien, since I took over this job, January 1, I bet I've had the questions 500 times: What’s the long-term growth strategy? What’s the long-term vision? And I think I've answered it the same way 500 times. I will tell you that once we get a few of these short-term issues out of the way.

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

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 have 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. I think once the results of the cash flow improvement process, a substantial part 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. It makes an impact on the overall First Energy credit metrics too, but a substantial impact inside the competitive business. I think we are 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 demand still 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 now we've got some margin there.

Got it. Thank you very much.

Good morning.

Good morning.

First question: So you guys have been making the rounds with the editorial boards. There have been some interesting quotes and I know that sometimes reports don’t come out exactly as intended. I wondered if you could elaborate a bit more on your comments about re-regulation and trying to save the company. How does that fit in with your ESP proposal and the PPA proposal? Can you comment more on that?

Let’s first talk a little bit about how our newspapers 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 drilled down into an article. Once that article is written, then there’s 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 a specific question: Are we in any way working to get the legislature of the state to consider re-regulating? My answer was no. In the context of the discussion about the PPAs, here’s 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 doing it 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 their 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 ensure they provide for the long-term security of baseload generating facilities, it’s great, but I don’t think we have time to wait on that either. Yesterday, the Senate Energy Committee put forth the bill that talks about asking the markets to try to come up with the process to ensure they ensure diversity of both fuel and types of 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 D.C. and everything else play out.

Okay. I appreciate the clarity. Just thought I would hear straight from you. So then the second question I have for you is the fuel saving that you guys have been talking about. How sustainable is that? And do you see potential other opportunities? Or just in other words, it sounds that these steps are one-off? Do you follow what I’m trying to say is, in other words, how should we think about your ability to recognize fuel savings going forward?

Well, 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.

Yeah. Thanks, Chuck. 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’re looking for those opportunities. But it’s going to probably take some innovative approaches and working with our suppliers to get there, given the economics that we see right now.

I mean, the obvious context is that 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 more duress is the coal industry. What we’re trying to do is work together, partner together for the survival of both.

Okay. Great. I appreciate it. Thanks a lot.

I mean, nuclear fuel was in the free cash flow; it seems 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. 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 there are in the market today, way ahead of when we needed it. We don't need it for a 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 on that this year.

Great. Thanks a lot.

Thanks. Most of all my questions have been answered already. I’m just wondering in the context of your guide, telling us that you’re trending toward the high-end of the guidance range for ’15, is that you’re trending toward the high-end of the guidance range in all three segments...or you’re doing better than expected in some towards the midpoint of this?

Yes.

..or you’re doing better than expected in some in towards the midpoint of this?

We are above the midpoint in all three segments through six months. And that combined with the CFIP results that we talked about that we’re going to get in the second half of the year are what cause us to say we can point you to the high-end of the guidance. If you follow-on questions, well, why don't you just kind of change your guidance? The answer is we got $1.15 in the bank through six months. Our midpoint of our original guidance was $2.55; that means we got a $1.40 that we've 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 top-end of the range. 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, 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 whether normal or better for the rest of the year, then you’re comfortable that you’re going to be at the high-end?

Yes.

Thank you.

Hey, everyone. I have a question about capacity performance. Can you explain what measures you have implemented at your coal and nuclear plants to minimize the risk of incurring penalties for performance failures during emergency situations? What specific actions have you taken at the plants compared to previous years?

Well, I would say this: we did a number of things to prepare our plants for the winter of 2014, ‘15, and order to ensure they operated reliably for this winter even in an environment where they 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’re willing to spend on reliability improvement versus where the capacity performance market clears. In terms of the specific numbers, I don’t think we’re in a position to talk about those at this time. We need to see where both the base residual auction and then we’re in particular the transaction auctions clear, because those are the more eminent. For the base residual, you got three years to figure how to get your units reliable for that one. The transition auctions are a little more pressing in terms of time. We’ll make those determinations once we see where the auction results come out.

Got it. Thank you, Chuck. Much appreciate it.

Good morning.

Good morning.

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

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

And are you still with your charges at the competitive business to reposition the portfolio?

They will be substantially finished by the end of 2015 with only a minor amount carrying over to '16.

Okay. Thank you very much.

Hey. Good morning, Chuck. Just I guess a PPA type question. Since the last call, you’ve 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 maybe not focused on what would be beneficial to like Ohio customers or Ohio rate bears in this case?

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

Great. Thanks for taking my question.

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

Just talk about that the $1.55 to capture high end for the rest of the year? On LTM, transmission is basically R&D at a midpoint is basically what I see. Is that right?

Yeah. That’s correct, Philson.

And do you expect transmission to only grow kind of $0.04 for the balance of the year to get to the high end? Or are there offsets there?

No. I won’t say there are any offsets. I talked a little bit earlier. I don't think you'll see the growth in the revenues that you did see in the first half. You saw $0.20 there in the first half. We’ve guided to the $0.30 for 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 with the second half of the year as they were at 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 year-over-year expected? But year-to-date, you guys are tracking at, are there offsets expected in the second half of the year?

Yeah. Right now, Philson, we are tracking about $0.01 behind where we’re last year, and we guided you to about $0.11 behind. There is a few offsets. We had some improvement in distribution. We’ve 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.

That will be at upper end also.

Thanks for joining us today and we look forward to speaking to you all again in August.